Fraudulent Transfers and Conveyances

Many people think that they can protect an asset by simply transferring it to a friend or relative before filing for bankruptcy. THIS IS NOT A GOOD IDEA! When a person transfers (conveys) property to another person with the intention of shielding that property from seizure by a creditor (or by the bankruptcy trustee), it is called a FRAUDULENT CONVEYANCE. In this situation, the law allows the creditor or bankruptcy trustee to sue the person to whom the property was transferred and get the property back!

Not all transfers prior to bankruptcy are considered fraudulent. For instance, if you sell a $5000 boat to someone and you receive about $5000 for it, the transfer would not be considered fraudulent. However, if you sold that same boat to your brother-in-law for $1, you may be getting your brother-in-law involved in a lawsuit to have the boat returned. In this case, you might be putting your bankruptcy discharge at risk and your brother-in-law might be somewhat unhappy with you! The general rule is that if a transfer is made within a year prior to filing the bankruptcy, and you did not receive “reasonably equivalent value” for the item transferred, the transfer is PRESUMED TO BE FRAUDULENT as to your creditors and the bankruptcy trustee. Even going back more than a year, if you give property away without a good reason, under conditions which make it appear that you were trying to hide the property from your creditors or an eventual bankruptcy trustee, then the transfer could be determined by a judge to be fraudulent and the transfer could be reversed and the property seized. And of course if any of your pre-bankruptcy activity is determined to be fraudulent, there is a likelihood that you could lose your bankruptcy discharge or worse! Fraudulent transfers are not to be confused with preferential transfers which are discussed in an earlier blog. In our example let’s say that you gave that boat to your brother-in-law a couple of months before filing bankruptcy because you legitimately owed him $5000. This creates a different problem it is not fraudulent (you did receive value for the boat in that you paid off the debt to your brother-in-law) but nevertheless the transfer can be undone because you are not allowed to pay debts to family members within a year prior to filing bankruptcy under the PREFERENTIAL TRANSFER rules! Bottom line make sure that you speak honestly with an attorney before deciding to go forward with your bankruptcy filing!