The Florida Bankruptcy Law Blog

Client Sells Former Residence And Pays Down Mortgage On Current Homestead: Fraudulent Conversion?

Five years ago one of my clients bought a new home pre-construction while he lived in his then current Florida homestead. The builder told him the new home would take 18 months to build. The builder finished early, in 12 months, and wrote my client a letter saying the home was soon complete and that under the construction contract he must purchase the new home in 30 days. The client had not yet put the existing home on the market (in the old days, it took only a month or two to sell a house). So, the client closed on the new home, then put the old home on the market. Three months after moving he sold the old home. He used all the sales proceeds to reduce the principal balance of the new mortgage on the new house. Now, he wants to file Chapter 7 bankruptcy and asks whether transferring the sales proceeds to the new house is a fraudulent transfer.

When the debtor moved to the new home he moved his homestead. The hold home ceased to be an exempt homestead property when the debtor moved in to the newer home as his principal residence. The use of sales proceeds to pay down the homestead mortgage was a conversion of non-exempt money to an exempt asset. The transfer cannot be attacked under Florida fraudulent transfer statutes because it occurred five years ago, beyond the statute of limitations. However, conversion of money to a homestead property within 10 years of filing bankruptcy may be avoided under bankruptcy law if the debtor intended to pay down his mortgage to avoid creditor claims.

Are Support Payments To Debtor's Parents Prior To Filing Bankruptcy Reversible Fraudulent Transfers?

If a debtor transfers money to his parents prior to filing Chapter 7 bankruptcy the bankruptcy trustee could try to recoup the money from the parents as recipients of fraudulent transfers. The general rule is that prospective bankruptcy filers should not try to remove non-exempt assets from their bankruptcy estate by transferring the asset to parents or other family members.

A client consulted with me today about the benefits and risks of his filing bankruptcy. The client is a well-paid computer consultant who will pass the means test because of significant ongoing medical expenses. The client’s family lives in India. The family is not well-off and they depend upon the client for support. Each month during the past few years this client sends money to help support his parents so they can have what we would consider necessities of life. Over the past year he has paid is parents over $20,000.