Should I transfer my home into an llc (limited liability company) to protect it from creditors before I file for bankruptcy?
If you are meeting with an asset protection attorney, and he is advising you to transfer various assets and properties into an llc, or into some kind of trust, then you’re probably not a good candidate for bankruptcy anyways. You need a different kind of lawyer for a different kind of case.
In bankruptcy, I can protect various assets under state exemptions that exempt (protect) your belongings. For instance, under Utah law, we can protect $3,000 of the equity in your car from creditors, 100% of your food storage, and $45,100 of your home’s equity under the Utah Homestead Exemption. But, and this is a big BUT, I can only protect property that has your name on it.
So if you transfer the home out of your name and into an llc, the llc cannot claim any kind of exemption in the value of your home. And if you own the llc, then you now own an llc that owns a home with no homestead exemption.
And now you’re thinking, “but what if I transfer the property into an llc that is owned by someone else?” Well, this is a fraudulent transfer. A “fraudulent transfer” is when you transfer ownership of something for less than fair value. So if you give your home to an llc in your friend’s name, and you receive no fair compensation, that fits the definition. The bk trustee can then “avoid” that transfer and put the property back in your name. However, since your name wasn’t on it when you filed the case, you cannot claim the homestead exemption.
Either way, you shot yourself in the foot to the tune of $45,100 of equity that you could have protected if you kept the home in your name. The trustee might want to sell your home to cash out that equity.
Just yesterday, I had a potential client call who had about $300,000 of equity in his home. He also had at least $200,000 of angry creditors threatening to sue him. Because of the equity in his home, he transferred it to an llc he had just created, and recorded the transfer with the Salt Lake County Recorder. He did this on Monday and then called me on Tuesday. When he called me, he was feeling pretty proud of himself.
I told him that I could not help him. The potential equity issue in his home was bad enough, but when you throw in fraud, that is not my kind of case.
If you want to protect your assets, you should talk to an attorney before you do anything as drastic as transferring ownership to someone or something else.