Gifts come in many shapes and sizes and, while usually a welcome thing, can have unintended consequences in a bankruptcy case. There’s basically two types of gifts: Those you give, and those you receive.
Gifts Must Be Listed As Assets On the Bankruptcy Schedules
When preparing the papers to be submitted in a bankruptcy case, any competent attorney will ask their client to list all of their assets, because that is required by the Bankruptcy Code. I’ve had many clients over the years give me their list, but omit items that were given to them as a gift.
When I am fortunate enough to avert disaster and discover this before their case is filed, the reason clients give for omitting it is that they think since they didn’t purchase it, it isn’t an asset.
If your rich relatives give you their $10 million dollar house, putting title into your name, just because you didn’t purchase it, it isn’t yours? Wrong. Gifts are just as much of an asset as anything else. If you own it, it’s an asset.
And if you don’t have sufficient exemptions available under applicable law to protect it, you could lose it (depending on which bankruptcy chapter you file). Regardless, you must list it or else you could face the loss of your discharge under Section 727 of the Bankruptcy Code, and/or possible criminal sanctions.
Gift Income Counts Towards the Means Test
Another frequent scenario is family assistance. That is, when a friend or family member gives (rather than loans) money to the debtor to help with living expenses.
Thanks to the new (as of 2005) means test created by Congress, all income received in the six (6) calendar months prior to filing a consumer bankruptcy case counts towards one’s eligibility to file.
Thus, even if the debtor who wishes to file bankruptcy has no wage or unemployment income at the time they file, they could conceivably be ineligible to file a Chapter 7 case now because of income received as a gift from friends and family within that 6 month period. Of course, the easy solution to this is to have those gifts be loans, or to wait more than 6 months after receiving them to file a bankruptcy case.
Gifts You Make to Others: Fraudulent Transfers or Charity?
The other side of this coin is gifts that the person filing bankruptcy (debtor) makes. The bankruptcy papers require disclosure of any gifts made to any entity in the 12 months prior to filing the bankruptcy case if it exceeds $200 to a family member, or $100 to a charitable organization. It also requires disclosure of ANY transfers of assets made in the 2 years prior to filing the case, for any purpose outside of the “ordinary financial affairs” of the debtor. Presumably this would exclude normal and regular gifts (such as the holiday or birthday variety).
The reason for these disclosures is to enable a Trustee or creditors of the debtor to determine if assets were essentially “squandered” which could otherwise have been used to pay the creditors. If large enough and outside the ordinary financial affairs of the debtor, a Trustee can sue the recipient of the gift to recover the value thereof, and if the transfers are particularly large and obvious, it could be grounds for denial of the debtor’s entire discharge under Section 727 of the Bankruptcy Code. Charitable organizations are usually safe from such gifts, as are holiday and birthday gift recipients, especially if they were regular donations.
But, if you’ve been Johnny (or Judy) Generous giving out large gifts, you better wait at least a year before filing a bankruptcy case (particularly Chapter 7). In fact, to prevent the Trustee from recovering on a fraudulent transfer theory, it needs to be at least 2 years, and possibly more depending on the laws of your state.
As always, it is very important to discuss all specifics of your situation with a qualified bankruptcy attorney before filing a case! (See why hiring a bankruptcy attorney is important).
This article is part of my bankruptcy alphabet series
Image Courtesy of Howard Dickins