Selling or giving away something innocently, without trying to hurt your creditors, could still give the trustee the right to get it back.
“Fraudulent Transfers” without Bad Intentions
It’s confusing: so-called “fraudulent transfers” don’t have to be fraudulent. They can be innocent of any bad intentions by you, the debtor.
In our last blog post we got into “fraudulent transfers” that DO come with bad intentions. Those involve the giving away or sales of assets WITH the “actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.) Basically, we’re talking here about hiding or disposing of assets to prevent the paying of debts. “Fraudulent transfer” law allows the bankruptcy trustee to undo, or “avoid,” that gift or sale. The person who got the asset from the debtor before bankruptcy has to give it to the trustee, and then to be distributed to the debtor’s creditors in bankruptcy.
It’s understandable why assets that were fraudulently hidden from creditors should be made available to them. But should same thing happen when the sale or gift was innocent of any bad intentions towards creditors? The law says “yes,” under certain circumstances. Today we get into those circumstances.
The Two Main Conditions for “Constructive Fraudulent Transfer”
Let’s say you have a second vehicle that you don’t need. So a year before filing bankruptcy you sell that asset and get paid what it’s worth. Then you use the proceeds of that sale to pay living expenses. Selling that vehicle is fine because you got fair market value for that vehicle.
Or let’s say you have that vehicle, but now you give it to a friend without getting anything for it. But at the time you are and continue to be solvent: you have more assets than debts. You file bankruptcy a year later because of a serious accident and huge medical bills that made you insolvent. That earlier giving away of the vehicle is fine because of your solvency at the time. You could do whatever you wanted with your assets a year earlier because then you had more assets than debts.
“Less Than Reasonably Equivalent Value” and “Insolvent”
But now let’s say you didn’t get anything for the vehicle at the time you were already insolvent. You weren’t intending to prevent your creditors from getting at the vehicle. You made no connection in your mind between that vehicle and your debts. You were just helping your good friend who needed a reliable car to get to work. Then you file bankruptcy a year later. That giving away of the vehicle is likely a constructive fraudulent transfer.
The law essentially says that regardless of your intentions, you shouldn’t be giving away assets when you have more debts than you have assets. The law says you should know better. And regardless of your intentions, your creditors should later be able to get at the value of that given-away vehicle. In bankruptcy, the trustee, standing in for the creditors, may well have a right to get that vehicle from your friend, sell it, and pay the proceeds to your creditors.