Timing Before a Bankruptcy

April 13, 2006

	Visited: 157
	Not rated
	Rate:

The federal bankruptcy code has specific time limitations when it comes to creditors challenging transfers. The code provides that debts incurred through actual fraud within one year of the bankruptcy filing cannot be discharged. Bankruptcy courts usually (but not always) interpret this power broadly enough to allow a challenge to any fraudulent transfer within the time frame, including exemption planning conversions.

Thus, one year emerges as a critical time period in pre-bankruptcy planning, and many times you will be advised to take a certain action, then wait for a little over a year to file for bankruptcy. Once again, transfers within the one-year period before the filing are not automatically invalid. However, bankruptcy courts will apply special scrutiny to transfers that occur within this one-year period, and you would have to answer questions concerning such transfers in writing, and under oath, on the bankruptcy petition.

On the other hand, this is not to say that transfers made more than one year before a filing are totally secure. In fact, the code also provides that bankruptcy courts may apply a state statute in determining whether transfers were fraudulent. Here, this means the Uniform Fraudulent Transfers Act (UFTA) with its four-year statute of limitations.

Warning

An important exception to the one-year rule is that in a federal bankruptcy setting, residency will be determined as of two years prior to the filing of the action. Effectively, this requirement prevents you from expanding your exemptions by moving to a new state during the two-year period prior to filing the action. Moreover, residency for the full homestead exemption is now 1,215 days or the homestead exemption is limited to no more than $125,000 by federal law.

In two situations under the federal bankruptcy code, transfers are automatically invalid. The code provides that "preferences" paid to insiders (family members and controlled business entities) within one year of filing are invalid. The period is 90 days for preferential transfers to non-insiders. Virtually all transfers by small business owners will be to insiders, and thus will come under the one-year provision.

Also, in a bankruptcy setting, under the rule governing "luxury purchases," debts incurred for purchases on credit or loans, of more than $500 from a single creditor, within the 60 days prior to filing, cannot be discharged.

Note that in the cases of preferential transfers and luxury purchases, the rules govern the covered transactions, regardless of the debtor's motive.

In some cases, state laws have an impact on the timing of the transfers.