Legal Question in Bankruptcy in United States

Notwithstanding that Joe gets to retain possession and use of the JetSki, on its face this appears to be what's called a fraudulent conveyance. The trustee will require evidence of payment to confirm that the transaction was a bona fide transaction in the sense that the person who purchased the JetSki paid it's fair market value. The trustee will also want to see that title passed to John. Then the trustee is going to ask where the money is. Joe is going to have to demonstrate, via documentation such as bank statements, cancelled checks and the like, where the money went. So long as the Jetske was sold for its fair market value, Joe's friend should be in the clear. Now Joe has to demonstrate what he did with that money and so long as that money was used for reasonable and necessary living expenses, which may include his bankruptcy attorneys fees, Joe should be good to go.

The trustee will set aside the sale, recover the jet ski and sell it (or alternatively seek to get the sales proceeds from Joe, but in most cases the proceeds would already be spent). Joe cannot transfer ownership of the jet ski. Additionally this type of activity could lead to Joe being denied his discharge in the Chapter 7.

Joe will be prosecuted for bankruptcy fraud by the FBI. He will be sentenced to 3 years in prison for his actions. Your facts do not state that money was paid to Joe, just that it was sold, meaning to me that no money was exchanged. This is an obvious effort to defraud his creditors.

There is no version of this that is a good idea. The other three attorneys before me covered what I would have said. You said you contacted an attorney, you should discuss this with your attorney.

The handshake understanding that the bankrupt seller will enjoy future use of an item that he sold before bankruptcy is not illegal, per se if the sale price was close to its cash value, and that the entire transaction was disclosed properly to the trustee and creditors. The seller would also need to explain where the sale proceeds money went. No matter what, however, the trustee would have the right to attempt to recover the jet ski and set aside the sale on preference or fraudulent conveyance grounds. If the money had not yet been paid to the seller, the trustee would have the right to collect it, unless this right is successfully claimed as exempt. The seller would also have the right to negotiate with the trustee to buy it himself, by paying the trustee reasonable value for the vehicle. In many states, small recreational vehicles can also be claimed as exempt, which would probably cause the trustee to loose interest in the transaction, assuming that it was properly disclosed.

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One cannot engage in a sham transaction and expect to pass the trustee's investigation. That said, if Joe wants to sell his jet ski, he can do so but it has to be for fair market value, since the trustee has the right to set aside the sale for less than value and sell the ski for the difference. Of course the buyer gets back what he paid first. Who says that it is not exempt. Joe can use his $5,000 wildcard exemption, and it only applies to the equity. I would expect that there is a lender who may have a perfected security interest. In which case the equity may be little or none. If so, the trustee will abandon the property and Joe can sell it for whatever he wants after the case is closed, being mindful that the lien follows the property. A second option is to redeem the property for the fair market value in the bankruptcy case and buy it free and clear of the lien. It is tricky and Joe should make full and complete disclosure to his bankruptcy lawyer prior to filing. I have had the case where I advised my client to buy back the property, exempt it, then sell it again because of the powers of the trustee.

Tom Zimmerman