Case Illustrates Difficulty Of Protecting In Bankruptcy Pre-Filing T...

There are so many reasons to stay away from bankruptcy- here is one more. In state court proceedings a debtor may do anything he wants with his exempt assets. In asset is exempt under Florida law a debtor can transfer it to a family member, put it in a trust, or sell it and by an alternative exempt asset. The definition of “assets” in our fraudulent transfer statutes specifically excludes exempt assets.

Not so in bankruptcy court. Bankruptcy trustees can attack pre-petition fraudulent transfers under either of two theories. Under Bankruptcy Code Section 544 a trustee can reverse a transfer which could be deemed a fraudulent transfer under the state’s fraudulent transfer laws. There is a four year look-back in Florida and most other states. Or, a trustee can attack a fraudulent transfer under Section 548 of the Bankruptcy Code which has a two year look-back.

A recent bankruptcy case decision pointed out that more than one federal appellate court believes that a bankruptcy trustee can attack and reverse transfers of assets within two years of a bankruptcy filing even if the assets are exempt under state law and could be claimed exempt on the debtor’s bankruptcy schedules. The courts reason that a trustee can seek to recover the transferred asset from the transferee because the transferee cannot claim the debtor’s exemptions and that the debtor cannot claim the exemption under the Bankruptcy Code  until the debtor actually files bankruptcy.

This is a harsh interpretation of Section 548 to debtor property which is off-limits to creditors after bankruptcy or in state law collections. The argument is another example of something I frequently advise my client and frequently mention on this blog; bankruptcy is the last resort if asset protection fails completely.  In re Lumbar, 2011 WL 4809870