The trustee in bankruptcy may set aside certain transfers of your assets if those assets are unfairly placed beyond the reach of your creditors. The transfer of your assets to a third person with the intent to prevent creditors from reaching the assets to satisfy their claims is called a fraudulent transfer.
Generally, transfers made within 90 days before you file for bankruptcy can be set aside. If the transfers involve relatives, general partners, directors or officers, they can be canceled if they were made within a year of your bankruptcy filing.
You must disclose and the trustee may set aside transfers made within one year of your bankruptcy filing if you intended to hinder, delay or defraud a creditor, or if your received less than reasonable value for the item and any of the following:
- You were insolvent at the time of the transfer or right after it
- Your operation was under-capitalized after the transaction
- You knew you would have debts beyond your ability to repay them
Purpose of Transfer
Not all transfers that move assets beyond a creditor's reach are considered fraudulent. Whether or not a transfer is intended to hinder, delay or defraud creditors depends on your purpose behind the transfer.
Courts look to factors that usually indicate an intent to avoid creditor claims to determine the purpose of a property transfer. For example, a court will look at whether a transfer was made to a family member or whether a transfer was concealed. The court will also look at whether you kept control over the transferred property and whether the transfer left you insolvent. These factors suggest that a transfer was fraudulent and should be set aside.
Defenses to Conveyance of Assets
A debtor can show many valid reasons to convey assets other than avoiding creditors. People have a constitutional right to control or transfer their property until a judgment creditor has a legal interest in the property.
Actual and Constructive Fraud
There are two types of fraudulent transfers in bankruptcy law. The first, actual fraud, involves the intent to defraud creditors. The second, constructive fraud, involves a transfer made in exchange for grossly inadequate consideration.
Actual fraud is when a transfer is made:
- Within one year before filing bankruptcy petition
- With the intent to hinder or defraud a creditor
Actual fraud requires proof of intent from the person challenging the transfer.
Constructive fraud is when the debtor:
- Receives less than the reasonable value of the item in exchange for the transfer
- Isn't able to pay debts either at the time the transfer was made or as a result of the transfer
Constructive fraud doesn't require proof of intent. The focus is whether the debtor received reasonably equivalent value. Courts will look at all the circumstances surrounding a transaction to determine whether the exchange looks even.
Timing of the Transfer
The timing of the transfer is important. Only those transfers completed within a year of the filing of the petition for bankruptcy may be reversed. The transfer of certain types of property requires more than one step to complete the transaction. In the case of real estate, for example, the transfer is not complete until a deed is recorded.
Recovering the Property
Once a transfer is determined to be fraudulent, the trustee may recover the property, or the value of the property, and make it part of the bankruptcy estate. An exception to this rule is when there is a bona fide purchaser, which is someone who acts in good faith to purchase property without knowing the rights of others to the property. The bona fide purchaser can keep the property.
Another exception is made in a case where valuable improvements to the property have been made. Those that made the improvements to the property are given a lien on the property, securing the improvements they made.
Temporary Restraining Orders and Preliminary Injunctions
Creditors who suspect the fraudulent transfer of property may be able to obtain a temporary restraining order and preliminary injunction to prevent a transfer before it happens.
Questions for Your Attorney
- Can a creditor object to my bankruptcy discharge based on fraudulent transfer of property?
- Can the trustee dispute a transfer of property that occurred over a year ago?
- Is the conversion of nonexempt property to exempt property before filing for bankruptcy considered fraudulent transfer of property?