Transfer of Assets Prior to Bankruptcy

I want to talk about a specific part of what happens when you sit down with a trustee to discuss bankruptcy as an option for dealing with a difficult financial situation.

There is a variety of questions that a trustee will ask anyone in understanding his or her predicament. Most people know that there is the potential for losing some of his or her assets by filing for bankruptcy protection. I won't go into detail on that. You can read here for a summary of the most common questions people have about bankruptcy and losing assets.

Let's take a detour and talk about some key principles underlying the bankruptcy system in Canada:
1. The honest but unfortunate debtor (i.e. the person who owes money) has a right to a fresh start.
2. The creditors (i.e. the people you owe money to) have the right to be treated fairly and equally.
3. The trustee acts as a referee in the process to ensure that everybody understands their rights and obligations. A referee's duty is to ensure that the rules are followed.

When somebody files for bankruptcy, his creditors have the right to know what he did with his assets prior to filing. The money that a trustee accumulates by disposing of a person's assets gets distributed to his creditors. Therefore, the concern is that the benefit to a person's creditors is reduced if an asset was given away or sold for something less than it was worth. The term used in bankruptcy law is "transfer at undervalue."

For transfers between people not related to each other, the trustee has a duty to apply to the courts to void a transfer if he believes the following conditions exist:
- the transfer was for inadequate value
- the transfer occurred within one year of the date of bankruptcy
- the debtor was insolvent at the time of the transfer
- the debtor intended to defraud, defeat or delay his creditors

If the courts agree with the trustee, the person receiving the asset will be required to pay to the trustee the difference between what was paid and what the asset was worth at the time of the transfer.

There are additional considerations for transfers between people who are related:
- if the transfer at undervalue was within one year of filing bankruptcy, there is no need to prove intent to defraud, defeat or delay the creditors
- if the debtor was insolvent at the time of the transfer and DID intend to defraud, defeat or delay his creditors, the review period is extended to FIVE years prior to the date of bankruptcy

If you are considering filing for bankruptcy and have any questions about what to do with your assets, my advice is to do nothing for now. You can call us at 310-PLAN or contact us by e-mail to discuss your situation. If you do end up having to file for bankruptcy, you can hopefully avoid inadvertently doing something with your assets that will cause further complications.