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Resolving a Fraudulent Transfer Painlessly through Chapter 13

If you owe “priority” debts like income taxes and/or support payments, you may be able to pay no more to protect a transferee. 


Let’s follow up on something we said in our last blog post two days ago. We showed how you can use a Chapter 13 “adjustment of debts” case to resolve a fraudulent transfer. Essentially, you pay extra into your Chapter 13 payment plan to make up for doing the fraudulent transfer. In the example we used, the debtor would pay a $225/month plan payment for about 22 extra months to make up for the $5,000 vehicle he or she’d had given away a year before filing bankruptcy.

But we ended that blog post by saying that under certain circumstances the results may be better. We show you how today.

Turning Lemons into Lemonade

Chapter 13 has a knack for solving two financial problems by setting them off against each other.

The first problem: the fraudulent transfer. You gave your friend your spare car a year ago because she desperately needed reliable transportation to commute to work. She now still needs it just as badly, so you don’t want a bankruptcy trustee to take it from her.

If you were insolvent at the time you gave it to her, the car could be taken under Chapter 7 “straight bankruptcy.” “Insolvent” simply means that you owed more in debts than you owned in assets. Then it wouldn’t matter that you gave her the car without any bad intentions towards your creditors.

So the solution we presented was to pay extra into your Chapter 13 plan to make up the difference. You in effect pay for the fraudulent conveyance. You double your generosity to your friend. After giving her the car earlier, you now pay its value over time so your friend can keep it. And you stay longer in your Chapter 13 case, delaying your fresh start. That’s awfully generous to your friend. Maybe too generous!

The second problem: you owe income taxes, or are behind in child or spousal support. Or you are behind on your mortgage and/or property taxes. Any and all of these problems could surprisingly help solve your fraudulent transfer problem.

How Owing Taxes/Support/Mortgage Payments Can Actually Help

Let’s say you owe $6,000 for 2016 federal income taxes and are behind $3,000 on child support. Neither can be written off in bankruptcy. These are also so-called “priority” debts, which must be paid in full in bankruptcy before anything goes to other debts.  

Let’s also say that you are $4,000 behind on your mortgage payments. Under Chapter 13 you are generally allowed to catch up on your mortgage before having to pay other debts.

These three special debts total $13,000. Assume you also owe an additional $75,000 in other debts: medical bills, credit and store cards, and personal loans.

Using the example used in the first paragraph above, let’s assume that you can afford to pay $225 per month into your Chapter 13 plan. Your income obligates you to do that for a minimum of 3 years, a maximum of 5 years. To pay the $13,000 at $225 per month will take nearly 58 months. (This excludes administrative expenses like trustee and lawyer fees, to simplify the calculations.)

This would leave nothing for the remaining $75,000 of debts. That means that those “general unsecured” debts would receive nothing—0%. In most bankruptcy courts that is allowed, as long as you genuinely can’t afford to pay any more than $225 per month.  

How This Solves the Fraudulent Transfer Problem

Chapter 13 law requires you to pay into your plan all that you can afford to pay for a certain length of time. For certain incomes it’s 3 years; for larger amounts it’s 5 years. Here we are assuming that the 3-year minimum applies.

In our example you are paying beyond the 3-year minimum in order to pay the three special debts. (The income tax, child support, and mortgage arrearage.) You can do so if you are indeed paying all you can afford, and finish within 5 years.

The Chapter 13 trustee will generally agree not to pursue the vehicle given through a fraudulent transfer if you agree to pay $5,000 beyond what you are legally obligated. That is what you are effectively doing here. You are legally obligated to pay for three years. However, you are paying nearly two extra years at $225 per month, essentially $5,000 extra. The fact that all this money is going to special debts—ones that you need and want to be paid—makes no difference.

The end result is that you kill two birds with one stone. You pay debts that must be paid (while being protected from their creditors).  You pay an “extra” $5,000 beyond the first 3 years, but that’s money you’d have to pay anyway. So those 4th and 5th years of payments both finishes what you need to pay to your special debts and prevents the trustee from chasing your friend for the car you gave her a year before filing.


The facts used in the example are no doubt different than your facts. And your facts may not fit so neatly into the lesson we are presenting. But the point is to show the possibilities. The point is also to show that the tactics involved tend to be quite sophisticated, especially when dealing with a complication like a fraudulent transfer. It should be very clear that the best solution for you will come through the counsel of an experienced bankruptcy lawyer.  


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