When a person or a business files for bankruptcy, debt relief is the goal. Depending on the type of bankruptcy, debts may be reorganized, or discharged, ending the duty to pay.

A filer’s assets and finances are open to review in the case. The bankruptcy trustee has the power set aside or cancel (avoid) fraudulent transfers that deprive creditors of rightful payment from your assets.

Looking for Fraudulent Transfers

When you file for bankruptcy, you complete schedules or lists about your finances, listing assets, debts, creditors and the like. You also make certain disclosures.

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. Transfers can take several forms, including selling an asset, or giving someone property rights in an asset.

You must disclose and the trustee may set aside transfers made within one year of your case if you intended to hinder, delay or defraud a creditor, or if you didn’t receive reasonable value for the item and any of the following:

  • You were insolvent at the time of the transfer or right after it
  • Your business was undercapitalized after the transaction
  • You knew you would have debts and wouldn’t be able to pay them

Fraudulent Intent

Not all transfers that move assets beyond a creditor’s reach are considered fraudulent. Fraudulent intent depends in part on your purpose for the transfer.

Courts look at certain factors that usually show an intent to avoid creditor claims. These factors include whether or not:

  • The transfer was to a family member
  • The transfer was concealed
  • You kept control over the property
  • You were insolvent after the 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 Transfer

You can show many valid reasons to convey assets other than avoiding creditors. People generally have the right to control or transfer their property until a judgment creditor has a legal interest in the property.

Two Types of Fraudulent Transfers

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 – you don’t receive fair value in a transaction.

Defining Actual Fraud

Actual fraud is when a transfer is made:

  • Within one year before filing a bankruptcy petition
  • With the intent to hinder or defraud a creditor

The person challenging a transfer as fraudulent must prove actual fraud.

Defining Constructive Fraud

Constructive fraud is when someone:

  • Receives less than the reasonable value of the item in exchange for the transfer
  • Can’t pay debts either at the time the transfer was made or as a result of it

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 filing the bankruptcy petition may be reversed. Some transfers take time and multiple steps. A real estate transaction is a good example, where a transfer isn’t done until a deed is recorded.

Recovering the Property

Once it’s determined a transfer is fraudulent, the trustee can recover the property, or its value, and add it to the bankruptcy estate.

An exception to this rule is when there is a bona fide purchaser. This is someone who acts in good faith to buy property without knowledge of the rights or claims?of others. The bona fide purchaser can keep the property.

Another exception is made in a case where valuable improvements are made to property. State laws give those who do the work, such as contractors, a lien on the property to secure payment.

Preventing Fraudulent Transfers

Creditors can ask the court for help when they suspect a debtor will make a fraudulent transfer of property. The court can issue a temporary restraining order and a preliminary injunction, ordering the debtor not to make the transfer.

Questions for Your Attorney

  • Can a creditor object to my bankruptcy discharge based on a fraudulent transfer of property?
  • Can the trustee dispute a transfer of property?completed over a year ago?
  • Is the conversion of nonexempt property to exempt property before filing for bankruptcy?treated?as a fraudulent transfer of property?