Selling or giving away something to prevent your creditors from getting it may make a certain amount of sense but could be very dangerous.
Good and Bad Intentions
Last time we introduced “fraudulent transfers.” We said that in spite of how the term sounds, a fraudulent transfer does not necessarily happen with bad intentions. You could innocently sell or give something away during the two years before filing bankruptcy. That could still be a fraudulent transfer, as long as that sale or gift satisfied a number of conditions.
However, a fraudulent transfer CAN come with bad intentions. Today we cover those made “with actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.)
Hiding Assets from Creditors
We can generally agree that in normal circumstances legally owed debts ought to be paid. The law backs this up with legally established procedures for collecting debts. Some of those procedures are centuries old. The law of fraudulent transfers is one of those. It goes was back to the Fraudulent Conveyances Act of 1571 in England, nearly 450 years ago.
A fraudulent transfer is basically a debtor’s selling or giving away of an asset to prevent a creditor from using it to get paid. When done with actual intent, it typically involves a debtor who gives away assets—or sells them for a very low price—as part of a scheme to leave himself with nothing to pay his creditors.
“Avoidable” by the Bankruptcy Trustee
The remedy for a fraudulent transfer involves undoing the transfer, selling the asset transferred, and using the sale proceeds to pay debts of the person involved in the fraudulent transfer.
This can happen outside a bankruptcy case. Most states have fraudulent transfer laws that allow creditors to undo a transfer when certain conditions are met.
But in bankruptcy cases the bankruptcy trustee acts on behalf of all the creditors. If the trustee succeeds in “avoiding” the transfer, he or she sells the asset and pays the creditors according to a detailed priority arrangement laid out in the federal bankruptcy law.
We have been referring to sales or gifts of assets, but the term “transfer” is very broad. It includes, among others:
each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property.
A transfer can also consist of the creation of a lien on an asset. (See Section 101(54) of the Bankruptcy Code for the meaning of “transfer.”)
To make better practical sense of this, here are a couple examples of fraudulent transfers done with actual intent.
A year ago you had two free and clear vehicles in your name. You learned that under the laws within your state you could “exempt,” or protect, only one based on their value. So to keep it away from your creditors, you signed one vehicle over to your 22-year old son. He didn’t pay anything for it. You’ve now filed a Chapter 7 bankruptcy to discharge all of your debts. The transfer of the vehicle’s title was an intentional act to prevent your creditors from being paid. The bankruptcy trustee would likely have the right to require your son to give him or her possession and title of the vehicle. The trustee would then sell it and pay the proceeds to your creditors.
You and your two siblings inherited a beach house from your parents. You have serious debt problems. You don’t want your share of this property to go to your creditors. So you and your siblings put the property into a family trust. When you file bankruptcy 18 months later, this transfer intended to prevent your creditors from being paid could be considered a fraudulent transfer. Your siblings would likely have the right to pay the trustee for your share of the property. Otherwise, the property might need to be sold to give the trustee the value of your share.
While it’s understandable that you would want to protect something from your creditors, it’s clearly dangerous to try to do so without legal advice. There are often ways of meeting your goals in a legal way. The asset in question may be “exempt” and already protected. It may make sense to sell it and use the proceeds in a legally appropriate way. You may well be able to protect it through a Chapter 13 case. There can be any of a number of practical solutions. Discuss the situation thoroughly with your bankruptcy lawyer, before you make the transfer. You are much more likely to meet your goals and avoid the headaches of a fraudulent transfer.