Watch out for fraudulent transfers in bankruptcy

A fraudulent transfer is a transfer of property before filing bankruptcy that may get you in trouble. If you’ve given away or sold any property in the six years before filing a bankruptcy case. you might be on the hook after your bankruptcy.

1. When you’re actively trying to screw your creditors. An actual fraudulent transfer is where the bankruptcy debtor transfers property actually intending to evade his creditors. So for example, a bankruptcy filer gives away a car to her nephew three months before filing bankruptcy because she doesn’t want her creditors to be able to seize it. That may be a fraudulent transfer. And the bankruptcy trustee can go after the bankruptcy filer and her nephew to get back the car (or the cash value of it.) An actual fraudulent transfer can also result in the bankruptcy discharge being taken away.

2. When you’re not trying to screw your creditors, but do it anyway. A constructive fraudulent transfer is where the bankruptcy debtor gives away property and doesn’t get fair value for it. So the bankruptcy filer isn’t trying to evade creditors, but sells her car to her nephew for $1,000 when it’s really worth $10,000. The bankruptcy trustee may have a claim against the filer and her nephew for the remaining $9,000 value of the car. Because this kind of transfer isn’t made with bad intent, it won’t be a basis for taking away the bankruptcy discharge. The trustee must show that the bankruptcy filer (1) was insolvent; and (2) didn’t get fair value back for the transfer.

3. The person who received the transfer may also be on the hook. The bankruptcy debtor isn’t the only one who can be chased by the trustee for a fraudulent transfer. The person who received the goods can also be sued. The best defenses the recipient may have are (1) that the property wasn’t actually worth anything in the first place; and (2) the transferee accepted the property in good faith and gave back fair value for the property.

4. The trustee can look back six years to find fraudulent transfers. The bankruptcy forms require a filer to disclose any transfer made within the two years before filing. However, the trustee can go after any fraudulent transfer made up to six years back. So people who have a fraudulent transfer in their past often wait until the time limit is passed before filing a bankruptcy.

We deal with fraudulent transfer issues all the time. If you have questions about a fraudulent transfer you made before your bankruptcy, or if you’re being sued by a trustee, get in touch.

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