House transferred to child - is it fradulent? (In CA)

[balaneki]

Hello,

A family member is planning to file for bankruptcy in California. I have been discussing this with her, and I am concerned about a particular issue. I'm hoping this is the correct place to post this question!

I'm not sure I have all of the details totally correct but this is my understanding of the situation.

This woman is in her early 60s (not yet 65). She lives in a home that is currently mortgaged. Her spouse passed away several years ago. She became unemployed a few months ago, and currently her only income is her husband's Social Security.

When her husband died, ownership of a second house, which they owned outright, passed into her name. The house was and is being used as a rental property, not as a residence for the family members. They have always planned to move into it at some point, but have not done so yet.

Approximately a year and half ago, she turned ownership of the house over to one of her adult children, who was unemployed and living with her at the time. However the child opted to continue living at home with her and renting the house for income.

This child is currently unemployed again and is still living at home with her. He continues to rent the house to another party.

The woman is now planning to file for bankruptcy. She has not defaulted on the mortgage for the home she lives in, she opted to continue making her mortgage payments in full at the expense of not being able to make her credit card payments. The income from the rental house is currently being used to cover part of the mortgage on her residence.

Based on what I have read (particularly section 548 of the Bankruptcy Code), I'm concerned the transfer of the house will be considered fraudulent because it occurred less than two years ago (let alone 7 years as per CA laws).

Here is the relevant section of the Code:

http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000548----000-.html

From what I have been told, it sounds as though none of the four subsections under Section 548(a)(1)(B)(ii) are applicable to the situation. She says that giving the house to the son had been the plan for years, discussed and decided upon before her spouse passed away. At the time of the transfer she had no plans to file for bankruptcy, she was paying her bills (credit card, mortgage, etc) and continued to do so until recent events (including unemployment) made it impossible to continue. (She stopped earlier this year at the advice of a lawyer.)

I don't believe the transfer of the house had anything to do with her debt, but I know her personally so it's easy for me to say that. A judge may feel otherwise.

My question is, should they be concerned about this?

She is going to consult with a bankruptcy attorney, and I haven't mentioned my specific concerns to her yet. Obviously she's going through a tough time and I don't want to make it worse. I would like to warn her so she can discuss it with the lawyer, but I'd like to know how serious it is because I say anything.

I hope this makes sense!

[keepmine]

It's serious and needs to be disclosed to her attorney.

[starr4law]

I agree with keepmine - it is very serious. The look back for these types of transfers is up to 10 years. I am certainly not suggesting that your family member WOULD hide this, but in case it has crossed her mind, let her know that property records are usually searched during the filing and that she would almost certainly be found out.

Good for you for thinking about this - alot of people wouldn't have put these facts together and known that it could be an issue.

[balaneki]

I agree with keepmine - it is very serious. The look back for these types of transfers is up to 10 years. I am certainly not suggesting that your family member WOULD hide this, but in case it has crossed her mind, let her know that property records are usually searched during the filing and that she would almost certainly be found out.

Good for you for thinking about this - alot of people wouldn't have put these facts together and known that it could be an issue.

Thanks! Not sure if I made it sound like she was thinking of concealing this issue, she was going to tell them. (Actually she doesn't know it could be a problem so had no reason to hide it)

My concern is that the judge will interpret it as fraudulent activity. Having gone over the facts again I am convinced it was just unfortunate timing. I'm very worried the family is going to end up with no place to live because of what amounts to a technicality.

She says "everyone" she has spoken to about the particulars of the situation has told her it's not a problem and that they can't take the house (including a bankruptcy lawyer), but just because everybody says it doesn't mean it's correct. I would like to be able to reassure her if possible, or help her brace for the worst if that's more likely.

Are there any other options besides Chapter 7 that might help them save the house?

[StartingOver08]

Sounds like she needs to interview more BK attorney's

[frogger]

It would most likely only be considered fraud if it was attempted to be hidden. As long as it is disclosed, explanations can be given.

The chips will land where they may...

[starr4law]

Could she look into reverse mortgage on the homestead property? Also, is there anyway she can reverse the 2nd home transaction so she has possession of it again and sell it (if there is equity involved).

The one thing I was wondering was if there was a mortgage on that second property or is there any equity in the home? If there is no equity, then the Trustee isn't going to care quite so much about the transfer.

Finally, if she cannot afford her current mortgage (well, her lazy kid should get off his butt and help her out, but that's a different story), a bankrutpcy really isn't going to help her . . . if her only income is SSI, she is judgment proof anyways.

Just my thoughts.

[balaneki]

It would most likely only be considered fraud if it was attempted to be hidden. As long as it is disclosed, explanations can be given.

I wish that were the case, but I'm afraid it isn't. From what I've read, in this type of situation the word "fraudulent" has a different meaning from the usual. It isn't based on having intent to commit fraud, it's applicable even if you didn't know that what you were doing would turn out to be problematic. If giving away property (for free) causes you to no longer have enough assets to cover your debts, it's an instance of fraudulent conveyance no matter what the reasons were.

In other words, if you, at the moment the property was given away, still had enough assets to cover your debts, and you didn't initiate the transfer to purposely defraud your creditors, it's not fraudulent conveyance. Otherwise, it is.

Does anybody know if I'm correct about this?

By the way thanks for the responses! Even if it's bad news it's heartening to hear other people's feedback.

[balaneki]

Also, is there anyway she can reverse the 2nd home transaction so she has possession of it again and sell it (if there is equity involved).

I got the impression that doing this would not help, and would probably make it worse. I can see returning the property, selling it, and converting the money into an exempt asset being viewed as deliberate fraud. I can't imagine any legitimate explanation of why that was done. Unfortunately, I also get the impression that had the ownership never been turned over in the first place, this WOULD have been a legally-valid way of handling the situation. Of course, as I said, there was no intention of filing bankruptcy at the time, so they had no way of knowing it would matter.

The one thing I was wondering was if there was a mortgage on that second property or is there any equity in the home?

The second property is owned outright. For the purposes of bankruptcy, I think it would be considered an asset on her part (due to fraudulent conveyance) and would need to be listed as such.

Finally, if she cannot afford her current mortgage (well, her lazy kid should get off his butt and help her out, but that's a different story), a bankrutpcy really isn't going to help her . . . if her only income is SSI, she is judgment proof anyways.

I'm afraid that she actually isn't "judgement proof". I may be mistaken (I would be very happy if I was), but I think the property, being a non-residence for the family, is considered simply an asset and had she not transferred it, the trustee would still have taken the property, sold it, and used the money to pay off the credit cards. So the end result would be exactly the same.

Does anyone know what happens if the trustee sells a property for more than the amount owed to the creditors? Would the debtor receive the difference?

In this situation, would it be better for her to just try to settle with the credit card companies rather than filing for bankruptcy, if that were somehow possible? I'm pretty sure she hasn't attempted that yet.

Would Chapter 13 be a better choice?

[starr4law]

I was thinking more along the line of her NOT filing bankruptcy and using the proceeds of the sale of the non-homestead property to use for purposes of settlement.

[tay666]

I was thinking more along the line of her NOT filing bankruptcy and using the proceeds of the sale of the non-homestead property to use for purposes of settlement.

Same idea. Not filing, but, I was thinking more along the lines of selling the home she is in.
Move to the house that is paid for, and not in her name any longer.
Then living off the SSI.
Creditors will not be able to touch her.
The SSI is protected, and the house isn't in her name.

[frogger]

I wish that were the case, but I'm afraid it isn't. From what I've read, in this type of situation the word "fraudulent" has a different meaning from the usual. It isn't based on having intent to commit fraud, it's applicable even if you didn't know that what you were doing would turn out to be problematic. If giving away property (for free) causes you to no longer have enough assets to cover your debts, it's an instance of fraudulent conveyance no matter what the reasons were.

Once again, as long as you disclose, you're not going to have any problems.

The transfer may be voided/reversed, but you're not going to have a fraud problem provided you disclose everything.

[balaneki]

Once again, as long as you disclose, you're not going to have any problems.

The transfer may be voided/reversed, but you're not going to have a fraud problem provided you disclose everything.

Again, in this situation the term "fraud" doesn't imply an intent to defraud anyone. In fact it's not even called "fraud", it's called a "fraudulent transfer" and implies no "guilt" on anyone's part. (The code specifically says it applies whether the situation was "intentional or unintentional" on the debtor's part.) As I understand it, even if she comes right out and tells them, it won't matter, because regardless of her original intent, it's a fraudulent conveyance. It's become pretty clear this is the case, unfortunately. If you become insolvent as a result of a transfer of assets (which I now believe she did), the transfer was a "fraudulent conveyance".

The primary issue is that, above all else, they don't want to lose the house they own. This is the primary goal for them and they are willing to do whatever it takes to keep this from happening.

I did speak to her about the fraudulent transfer issue. We have almost come to the conclusion that the best thing to do in this situation is to forget about bankruptcy to avoid the issue entirely (we have also spoken to a bk lawyer who essentially said the same thing). Instead, she would borrow as much money from friends and family (if possible) as she can, get settlements with the card companies and pay of the debts in full, with no chance of defaulting on any of the settlement payments. The total debt amount is not nearly as high as if could be, and I think depending on how the settlements work out, it may be doable for them. She's going to try going through a debt reduction agency to see how much then hey can help her save.

After that, she would give up the home she's living in that has a mortgage on it, allow it to go into foreclosure, and take up residence in her son's home. As far as I can tell, unless I'm mistaken and there's something wrong with this plan (please, if anyone has any input it would be greatly appreciated), this seems to be the only way in which they can be sure they won't run the risk of losing their other home. Isn't it true that the mortgage company cant take anything from you when they foreclose other than the house that is mortgaged?

I feel it would be better to be in debt to family members and friends than to have no place to live.

[mrskal]

. Isn't it true that the mortgage company cant take anything from you when they foreclose other than the house that is mortgaged?

.

I think that really depends on what type of mortgage she has. Do you know the details of that? Is it only a first?

[starr4law]

It depends on several factors. If the first mortgage waives the deficiency and is there a second mortgage. However, if after everything is said and done, she does move into that "judgment proof" category, then of course the point is moot.