Why Being a Good Parent May Cause you Problems in Your Bankruptcy

As a dad to six kids I want to provide for my family the best I can.  Every parent does.  However some of the things you do to help your kids out now can actually cause you problems if you end up needing to file for bankruptcy down the road.  Two things that can cause problems in your bankruptcy are the transfer of assets to your children and repaying loans to your children.

The “Car for My College Kid” Problem

When your kid turns 16 they may inherit one of the family cars to use while they are in high school.  Or, some parents will even go out and buy a car for their teenager to drive and may even have their son or daughter help pay for it. Then, when they finally hit 18 and prepare to leave for college many parents will transfer the car into their child’s name before they leave the home.

This is all done completely innocently and with the best intentions. However if you as the Mom and Dad end up filing bankruptcy at any time in the next two years it could cause you problems.  Here’s why.  Most people that are going through the bankruptcy process have some concern that the bankruptcy court is going to swoop in and take their property.  In hopes of avoiding this some believe that it would be a good idea to transfer all of their cars, boats, etc. out of their name and into the name of a family member or friend.  Then, the thinking goes, when the bankruptcy case is over they will have their friend or family member transfer everything back to them.

The problem with this is that it is fraud.  And because you are not the first person to file for bankruptcy, the lawmakers were aware of this issue and have put provisions in the bankruptcy code that allow a bankruptcy trustee to reverse any transfers of assets within two years prior to the filing of your bankruptcy case if you didn’t receive fair market value for the asset.  The idea is that this will put a stop to people thinking they can just have their brother “hold” their assets while they are going through bankruptcy.

The problem we run into is that this rule captures the innocent transfers like the one of the car to your college-age kid.  The remedy for the bankruptcy trustee is to go and get the asset you have transferred and bring it back into your bankruptcy estate.  Here in Arizona many of the bankruptcy trustees will allow you to pay to the bankruptcy court the value of the car that was transferred to avoid your child having to deal with the bankruptcy trustee and surrendering the car for the benefit of your creditors.

The “Paying My Kids Back” Problem

Bankruptcy is almost never the first choice when people are seeking solutions to their debt problems.  They usually seek out help from friends and family.  For those with grown children sometimes this means asking your kids to help you out.  Or as is often the case the adult children will step in and help without even being asked.

While the help is appreciated sometimes it doesn’t solve the debt problem, so you make the decision to file bankruptcy.  Naturally you want to pay your kids back.  So you gather together the cash you have, send it to your son or daughter, and then prepare to proceed with your bankruptcy.

This, again, is natural and done without any intent to defraud anyone.  However, we will be required to disclose any creditor who you have paid more than $600 – and if the payments were to a family member, we have to disclose any payment that happened at any time within the year prior to your bankruptcy filing.

This is a situation where again the court is trying to curb any idea of hiding cash or transferring assets prior to bankruptcy.  But as with the transfer of assets, this rule catches a lot of innocent people in its net.  There are really two options in dealing with the payment of family members prior to filing bankruptcy: (1) you can wait until more than a year has elapsed since your last payment.  At that point the transfer will not be an issue in your bankruptcy; or  (2) you can plan on paying the value of the transfer to the trustee who will then take the money and pay it to your creditors.  If you are not dealing with a large payment this may be the better option and will allow you to file your bankruptcy case sooner rather than later.

As the saying goes, no good deed will go unpunished.  But as a parent, this shouldn’t really come as too big of surprise :).

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