Right of creditors to home recently sold

[Michael Shanley]

What is the name of your state? CA

Person 1 is about to file bankruptcy (Chap 7) and owns a home with some equity, though not large. Person 1 needs to sell the home as they cannot afford the payments. If person 1 sells the home, the likey net from the home would not cover credit card debt. so would be taken by creditors, leaving person 1 with nothing from the sale. An alternative is that person 1 sells to a friend, person 2, in a private sale before the bankruptcy filing, at a modestly reduced sales price--one that leaves person 1 with no net proceeds from the sale, but gives person 2 some instant equity in their new home. Person 2 agrees to share equity with person 1 if he resells the house within a year or two. Thus both person 1 and 2 are better off, but person 1's creditors are worse off. Is this second alternative legal? Will the home sale likely be investigated as part of the bankruptcy, and would person 2 likely be creating legal or financial problems for himself?

 

[HomeGuru]

What is the name of your state? CA

Person 1 is about to file bankruptcy (Chap 7) and owns a home with some equity, though not large. Person 1 needs to sell the home as they cannot afford the payments. If person 1 sells the home, the likey net from the home would not cover credit card debt. so would be taken by creditors, leaving person 1 with nothing from the sale. An alternative is that person 1 sells to a friend, person 2, in a private sale before the bankruptcy filing, at a modestly reduced sales price--one that leaves person 1 with no net proceeds from the sale, but gives person 2 some instant equity in their new home. Person 2 agrees to share equity with person 1 if he resells the house within a year or two. Thus both person 1 and 2 are better off, but person 1's creditors are worse off. Is this second alternative legal? Will the home sale likely be investigated as part of the bankruptcy, and would person 2 likely be creating legal or financial problems for himself?

**A: in your scenario, the BK Trustee would invalidate the sale on the basis of fraud.
Nice try.

 

[Ladynred]

An alternative is that person 1 sells to a friend, person 2, in a private sale before the bankruptcy filing, at a modestly reduced sales price-

Such a transaction would be seen as a fraudulent transfer and you'd be in deep doo-doo for trying to get away with it. The Trustee would reverse the sale If you sold the house to your 'friend' at FAIR MARKET VALUE that might be different, but it would STILL be questioned. . If the house has less equity than the generous CA homestead exemption, then the Trustee could not touch it - it's exempt equity, even if it is a small amount.

Get thru the bankruptcy first, THEN sell the house. If it sells for a lot, then the Trustee would likely take the excess and pay your creditors out of it.