What Happens to Gifts that I Make under Bankruptcy?

‘Tis the Season, or so I hear, in which many of us are not only receiving gifts of one sort or another from others but in which we are likely to make gifts to others. Some of us make gifts or tithe all year long or are even required (or encouraged) to do so by stricture of our faith. With regards to bankruptcy, there is both good and bad news when it comes to gift-giving.

As far as the Bankruptcy Code is concerned, there is gift-giving and then there is gift-giving. That is, there is gifting between individuals on a simply personal level—between spouses, family-members, friends—and, then, there is gifting for religious, charitable purposes. The first sort of gifting is problematic. This is the “bad news” of giving. Conveyances or transfers between a debtor considering bankruptcy and another individual he or she is personally acquainted with can appear fraudulent to the bankruptcy trustee, judge, or creditors who, after a bankruptcy petition is filed, may not be receiving the full amount that they believe they are owed.

Specifically, if a transfer or conveyance of property is made within two years of the filing of a Chapter 7 bankruptcy petition by an insolvent debtor, a creditor or trustee may object to a discharge. The trustee may also attempt to recover the transferred property, which means that he or she may take the property from the party is has been transferred to. For any of these things to occur, the objecting creditor or trustee must prove that the transfer was made with the intent to “hinder, delay or defraud creditors.” An honest gift within two years of the filing of a petition, when events which can force a person into considering bankruptcy can and do happen so much faster than that, may not have been accompanied by any intent to defraud and may not, logically, look like it was, but, nevertheless, if the possibility exists that an objection may be raised which could endanger the entire petition, it may be best to wait until the year has passed to file the petition. This is the sort of “pre-petition planning,” however, that it is best to discuss with an experienced bankruptcy attorney.

Additionally, especially in a Chapter 13 bankruptcy, some creditors are “priority” creditors who are entitled to be paid first and foremost. These “priority” creditors include those owed child support or other domestic obligations, the trustee who requires a 10% or so fee from a Chapter 13 plan, and others. Transfers and conveyances can raise questions with regard to the “preferences” owed certain creditors, which, in addition to “priority” creditors, also includes the preferential status of secured creditors such as a home loan mortgagor over unsecured creditors such as credit-card issuers. A transfer of property worth more than $600 within 90 days of the filing of a petition from a debtor that allows a creditor (which could include a family-member or friend owed money to) to receive more than they would have received in a Chapter 7 liquidation may be set aside by the trustee. Again, these sorts of considerations prior to filing a bankruptcy petition are best discussed with an attorney.

On the “good news” side of gift-giving, there is an exception in place for certain charitable contributions. The Religious Liberty and Charitable Donation Protection Act of 1998 amended the Bankruptcy Code to protect contributions made to protected organizations. They must not have exceeded 15% of the debtor’s gross income  the year they were made, and, if they were, must have been consistent with the debtor’s history of such giving. The 15% limit applies to each individual transfer, also, not the entire year’s worth of charitable contribution, even if it exceeds 15% in total (courts have ruled that no part is protected, however, if a total15% is exceeded without any past giving history). The specifics of the unavoidable nature of such gifts and whether a receiving organization is a protected organization are complicated and should be discussed with a bankruptcy attorney.

Additionally, there are similar considerations to post-petition transfers and conveyances.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.