Charitable Bankruptcy
Many people will be filing bankruptcy between now and October 17, and some of these debtors will go into bankruptcy knowing they have some non-exempt property which will be taken by the trustee for the benefit of their creditors. One such prospective bankruptcy filer told me last week that he had over $1,000 of liquid assets which he was prepared to surrender to his creditors in bankruptcy. The person asked me if it was permissible for him to sell his assets (in this case, stock) and donate the proceeds to the Katrina victims.
I advised the client that the donation could be seen as a fraudulent conveyance which, in theory, could be overturned or could be used to challenge his bankruptcy discharge. However, I further advised that, in practice, I do not think his donation would be challenged. A bankruptcy trustee is unlikely to sue the Red Cross to return this type of donation. Also, I suspect a bankruptcy court would find it difficult to punish a person for this type of selfless act. In general, a debtor is free to spend non-exempt money on personal consumption provided he does not purchase non-exempt assets. Florida courts have held that a debtor may gamble money rather than give it to his creditors. A donation of money that would be forfeited in bankruptcy is a creative way to apply the funds for someone else's benefit, even if that someone is a stranger rather than a creditor.
For those rushing to file bankruptcy prior to October 17, you can consider liquidating non-exempt property and donating that property to the hurricane victims.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
