What can a creditor do when a debtor gives assets to relatives in order to keep them out of the bankruptcy process?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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First, you can make the trustee aware of the situation. The debtor is required to disclose transfers of property made within the previous year on a form called the Statement of Financial Affairs. If the debtor did not do so, the judge could dismiss the case. In any event, this type of transfer is called a fraudulent transfer. The Bankruptcy Code gives the trustee the power to avoid transfers made within 2 years of the bankruptcy if the debtor made the transfer with the intent to hinder creditors, got little or nothing in return for the property, was insolvent when he made the transfer, or made the transfer to a business associate or a relative, among other reasons. 

The power of the trustee to “avoid” the transfer means that trustee can invalidate or undue the transfer. When the transfer is undone, the property goes “back into the pot.”  The effect is that if the property is sold to satisfy the debtor’s obligations, the proceeds will be used to pay all of the creditors by the order set out in the bankruptcy code. Even though you may be the one to “tip off” the bankruptcy trustee, your status as a secured or unsecured creditor remains the same. You don’t get a “finder’s fee” bonus. In addition to his power to void the transfer, the trustee can also sue to recover the property under state law.

Second, if the trustee declines to pursue the property, you could try to recover the property yourself under state law. Because the property is technically an asset of the bankruptcy estate, you would need to file a motion to lift the automatic stay in order to file suit in state court. You will probably also want an order abandoning any claim in the property to you. Otherwise whatever property you collected would have to be shared with the other creditors. While you could get a bigger share for doing the work, it still might not be worth the effort.

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