In the bankruptcy case of Grueneich, James B.; In re (Doeling, Trustee, v. Grueneich) the bankruptcy court voided a property transfer from the debtor to his parents because the court ruled that the transfer was fraudulent/in bad faith.

The details of the bankruptcy case:

The debtor approached his parents about buying the property for less than it was worth when he ran into financial trouble and could not afford a $65,000 mortgage on the property. Although the property was worth $119,000, the parents bought the property for $65,000, transferring the property from the debtor to the parents. But when the debtor filed for bankruptcy, the trustee voided the transfer saying it was fraudulent.

The details of the ruling:

The court ruled that the transfer was avoidable and the debtor’s parents were not entitled to an equitable lien to the extent of the refinanced mortgage because they were not good-faith transferees. The BAP affirmed. The panel said the evidence supported the bankruptcy court’s findings that the debtor’s parents paid $65,000 for a property worth nearly twice that amount. The panel also agreed that the debtor’s parents were not good-faith transferees because they had sufficient knowledge to place them on inquiry notice of the debtor’s possible insolvency. Because they were not good-faith transferees, Section 550 said they were not entitled to a lien in the amount of the refinanced debt.

It is very possible that these parents were not fully aware of their son’s financial problems; but these types of transfers can create huge problems for everyone involved. Sometimes when a debtor is facing financial troubles he/she will engage in “creative” tactics to overcome the financial crunch. Unfortunately when they file bankruptcy, these “creative” tactics can be ruled fraudulent and reversed by the bankruptcy court, causing everyone involved big headaches. If you are considering bankruptcy and have engaged in any asset transfers make sure that you reveal this to your bankruptcy attorney. He/she will know the best moves to take if you have inadvertently engaged in a fraudulent asset transfer before bankruptcy.