Christmas and Bankruptcy

Christmas gift asset bankruptcy transfer

 

One of my more detail-oriented clients asked me an excellent question today about Christmas and bankruptcy, and I want to share some of my thoughts in this forum.

The client is planning to file for bankruptcy in January, or possibly February, and his biggest concern was about how this was going to affect Christmas.  You see, one of the questions asked in the bankruptcy process is whether you have given anything away to family members or friends in the months before you file.  She was concerned that this meant she could not give any gifts for Christmas!

To examine how this works, we need to look at the rule about “fraudulent transfers” and the role it plays in bankruptcy.  The purpose is simple and straightforward: we don’t want people with big assets being able to simply give those assets away, and then file for bankruptcy.  This would be unfair to creditors, who might be entitled to money if the assets hadn’t been given away.

The purpose is NOT to interfere with ordinary, everyday aspects of living, and this can include holiday gifts.  While a strict, technical reading of the code implies that even the smallest gift can be “avoided” by the trustee (essentially, the trustee takes it back from the recipient), in practice, as long as the gift is reasonably small and typical, that simply doesn’t happen.

This is for two reasons.  First, the amount of time and money the trustee would spend to get a small gift back is simply not worth it in administrative expenses alone.  Second, trustees are real people!  They have families, often have children, and most of them celebrate some December holiday involving gift exchange.  They understand, as long as you aren’t being abusive about it.

When we run into problems is when the gift is exceptionally large, like a vehicle or a transfer of over a thousand dollars.  It is not okay to give away large amounts of money or assets when you can’t repay your creditors; if you are heading for a potential bankruptcy filing, that doesn’t mean you can’t give gifts, but those gifts should be modest, with an emphasis on personal rather than price-tag.

One additional note: charitable giving is exempt from this analysis.  The code specifically allows you to make charitable donations.

This is one of those situations that calls for common sense.  Don’t buy things you can’t really afford, and don’t go overboard if you will be embarrassed explaining the transaction later to a trustee.  That said, a looming bankruptcy is no reason to cancel Christmas.

~Andrew

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