Transferring real estate while contemplating bankruptcy can raise some issues. But transferring real estate after the bankruptcy case has been filed without the permission of the bankruptcy court is a big “no no.” And as a debtor in learned in a February 11 Bankruptcy Court ruling out of Worcester, it can raises some serious problems. In his case, a denial of his discharge.
The chapter 7 debtor filed the case on May 18, 2007. He owned his home along with his mother. According to his bankruptcy schedules, he valued the home at approximately $315,000 and with a mortgage of about $263,000. A mere 7 days later, the debtor transferred his interest in the home to his mother and father for $1.00. The debtor’s parents paid off the outstanding mortgages, as well as some other bills at closing.
Debtor attempted to argue that there was no equity in the home and that the appraisal should not be considered as “completely accurate”. However, the appraisal was dated 8 days prior to the case being filed, and it was an appraisal commissioned by the debtor himself. Notwithstanding this creative position, the debtor never produced any evidence demonstrating that the property would be appraised at another value (i.e., by submitted evidence of another appraisal, or of some substantive defect with the appraisal submitted).
The trustee contended that the property had equity and that the debtor intended to “hinder, delay or defraud” the creditors, the trustee and the bankruptcy estate by transferring it out of his name. Because of that not only should the debtor’s discharge be denied, but the transaction should be avoided (or set aside).
The Court Rules
In analyzing whether the debtor should be denied a discharge, the Bankruptcy Court looked at several factors: the “insider” relationship between the debtor and her parents; the fact that the debtor still resided in the property (which was not contested); the lack of adequate consideration ($1.00); and the fact that the transfer occurred without the Court’s permission or the court’s knowledge (although there was no evidence that the transaction was intended to be kept a secret). The Court considered that at a minimum there was $15,000 in equity in the property based on the debtor’s appraisal and her schedules. Based on that, the Court found that the debtor intended to defraud, hinder or delay and therefore, the discharge was denied.
As for the transfer, the court found that Section 549(a)(2)(B) of the Bankruptcy Code applied; the transfer of the real estate was avoidable by the trustee because the court’s permission was not obtained.
There is no happy ending here, and based the filings, I cannot understand why the debtor transferred the property. On the debtor’s schedules, there are almost $37,000 of unsecured claims which will not be discharged. According to this debtor’s schedules, he was seeking to exempt $37,215 in equity in the property based on the Massachusetts Homestead Statute (c. 188, sec. 1). Assuming he had a properly recorded Declaration of Homestead (which gives him the protection), the property would have been exempt from the bankruptcy estate, and from the reach of his creditors. If he owned the property with his mother, his equity interest would only be approximately $19,000. Even if the debtor did not have a valid declaration of homestead, the debtor could have still utilized the federal exemptions available to him, and the home could have been exempt. Instead, what appears to be the debtor’s nonsensical actions have caused him to lose his chapter 7 discharge.
