Protecting Your Assets the Right Way

A creditor bearing down on you, or an impending bankruptcy, brings many concerns and unknowns. You may have a family farm, a collectible such as an antique car or other assets that you wish to protect from your creditors. In order to save those assets, you may think it is prudent to transfer those assets to a spouse, family member or close family friend. However, these types of approaches are not as straightforward as they sound and can come with pitfalls where the transfer is not properly completed.

Before attempting to protect your assets, a few helpful tips should be remembered.

Transfer The Asset for Fair Market Value

This is the most important rule to remember. If you have a quarter section of land or an antique car, you cannot simply gift it away to a family member before assigning into bankruptcy. All transfers when you are, or are about to be, insolvent will be subject to scrutiny. The Fraudulent Preferences Act requires that all transfers to a non-arm’s length party (think someone you know better than an acquaintance) require the transfer to be for fair market value.

In order to do so, it is generally advisable to obtain a valuation from an arm’s length third party, such as an auctioneer. Having these objective benchmarks will allow you to show to your creditors, and the Court if necessary, that the transfer was within reason.

However, just because you have transferred the asset for fair market value does not mean you are out of the woods. The cash you receive for those assets needs to be accounted for, as your creditors may be entitled to a share of those funds as well. If you are planning a transfer, you should consult with your legal advisors as to if those funds should be held in a segregated trust account, paid directly to creditors or otherwise.

Among other things, you will want to make sure you account for your secured creditors who may have a security interest in the asset you have sold.

The Asset May be Exempt

Just as important to consider is the fact that the transfer may be unnecessary. There are various pieces of legislation that provide bankrupt parties with exemptions, meaning certain assets cannot be seized. This is especially true for farmers, who, provided they have a plan to continue actively farming, may be able to retain many of their farming assets.

It may be that the transfer is unnecessary, and you are not only incurring extra work and expense, but you are also raising the suspicions of your creditors. A careful evaluation of whether or not the asset is even capable of seizure should be done before you begin to decide where and how to transfer it.

Conclusion

Of course, before any transfer of this nature is undertaken, you should consult with both your legal professional and/or your insolvency professional to ensure you are acting in accordance with the law. Transfers prior to an insolvency will raise red flags for any creditor, so you will make sure the reward outweighs the risks and difficulties you will face.

Should you have questions, please contact Robertson Stromberg today to begin the process.

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