There’s an interesting bankruptcy case, Carver, Chaddrick R.; In re (Richardson, Trustee, v. Carver), (Bankr. C.D. Ill. 2009) in which a debtor transfers the profits from the sell of his house into a bank account of his non-debtor spouse; a move which initially jeopardizes his Chapter 7 bankruptcy discharge. The bankruptcy allows the transfer because the court noted that it was made in an attempt to save the debtor’s marriage not defraud creditors.

The details of the case:

The debtor was a real estate agent. Prior to filing for bankruptcy, his solely owned business had acquired 22 properties, all of which were subject to mort¬gages that he personally guaranteed. The debtor’s financial problems began when the interest rates on those mort-gages started adjusting upward. The debtor’s wife, who did not file for bankruptcy protection, was a kindergarten teacher, was not involved in the debtor’s real estate activi-ties, and was unaware of his financial problems. After the couple met with a bankruptcy lawyer, they placed their home on the market. The debtor was the listing agent. The couple netted $206,969 from its sale. The debtor’s wife deposited half of the proceeds into her credit union account. She deposited the other half – the debtor’s half – in a new account in her name alone. The debtor’s share of the commission from the sale was also deposited into the new account. The debtor’s wife used $85,000 from this account to pay off one of the debtor’s creditors and used the rest of the money in the account to pay the debtor’s bills.

The debtor told the court that he went along with the arrangement because his wife no longer trusted him to make financial decisions and that he wanted to save his marriage. The bankruptcy court agreed and noted the fact that the money was used to pay creditors as further proof that there were no fraudulent intentions on the part of the debtor. It sounds like the debtor may have had some pre-bankruptcy counseling advising him to repay secured creditors with the proceeds of that sale. If so, it seems that the advice paid off. But my advice to any debtors considering bankruptcy is–don’t make any pre-bankruptcy transfers without the counsel of a bankruptcy attorney. This debtor’s situation turned out well; but could have easily turned out badly for him and his wife. Bankruptcy courts often rescind pre-bankruptcy transfers which can more than complicate life for the debtor and the person he/she transferred assets to.