In bankruptcy law, the term “fraudulent transfer” often raises eyebrows and causes concern and anxiety as the term seems to indicate criminal activity. Understanding fraudulent transfers and what they encompass is important for anyone contemplating bankruptcy. This post will break down the concept, explain lookback periods, and talk about how it might affect debtors and those who receive transfers in the run up to your bankruptcy filing.
What Are Fraudulent Transfers?
Fraudulent transfers occur when a debtor transfers property or assets to block, slow down, or deceive creditors or transfers property for less than its fair market value while insolvent. These transfers can be either intentional or constructive and the recipient’s relationship to the debtor plays a big role in determining if it’s fraudulent or not. Transfers to friends or family are given increased scrutiny as the trustee presumes that transfers to them rather than random strangers are more likely to be fraudulent.
Types of Fraudulent Transfers:
- Intentional Fraud: When a debtor deliberately transfers assets to keep them out of creditors’ reach.
- Example: Transferring a house to a family member for $1 before filing for bankruptcy intentionally to prevent a creditor from placing a lien on the property.
- Constructive Fraud: When a debtor transfers assets below fair market value while insolvent, even without fraudulent intent.
- Example: Selling a car worth $10,000 to a friend for $500 when unable to pay debts and in need of money.
Lookback Periods in Bankruptcy
Bankruptcy trustees can “look back” at transactions made before the bankruptcy filing to identify potential fraudulent transfers. The typical timeframe for investigating fraudulent transfers is two years prior to the bankruptcy filing. Some jurisdictions may extend this period to four years, particularly if state laws apply. Additionally, a transfer made to an “insider”, IE a member of the debtor’s immediate family or social circle, made within the last year is almost always subject to claw back during bankruptcy.
If a transfer falls within these timeframes, it can significantly affect the outcome of bankruptcy proceedings and cause other consequences both for the debtor and the recipient.
Consequences for Debtors and Recipients
Fraudulent transfers can have serious repercussions for the debtor and the recipient of the transferred assets.
For Debtors:
- Denial of Discharge: The bankruptcy court may deny the discharge of debts if fraudulent transfers are discovered and prevent a debtor from filing bankruptcy again for a certain period of time.
- Criminal Charges: In severe cases, intentional fraudulent transfers can lead to criminal charges of bankruptcy fraud.
- Extended Bankruptcy Process: The court may delay or complicate the bankruptcy proceedings.
For Recipients:
- Asset Recovery: The bankruptcy trustee can sue to recover the transferred assets and force a sale of the transferred property.
- Financial Liability: Recipients may be required to pay the fair market value of the asset if they can’t return it which could result in wage garnishments, liens, or other legal action.
- Legal Costs: Defending against a fraudulent transfer claim can be costly and time-consuming.
Avoiding Unintentional Fraudulent Transfers
To steer clear of unintentional fraudulent transfers, consider the following advice:
- Maintain Accurate Financial Records: Keep detailed records of all transactions, especially those involving significant assets.
- Fair Market Value Transactions: Always ensure that any transfer of assets happens at fair market value.
- Timing Matters: Be cautious about transferring assets when you’re in financial distress or considering bankruptcy. Be especially conscious of transferring assets to friends or family.
- Consult a Professional: Before making any significant financial moves while in debt, consult with a bankruptcy attorney or financial advisor.
- Disclose Everything: If you file for bankruptcy, be transparent about all financial transactions during the look back period. As a rule of thumb its best to disclose everything up front rather than have the trustee find out later.
Getting Help Filing for Bankruptcy
If you are thinking about filing for bankruptcy, getting legal counsel can help identify potential issues before they escalate. An attorney can review your financial history, assess the legality of past transactions, and provide advice on best practices moving forward.
Contact Brock and Stout if you are unsure about a particular transaction or your overall financial situation. Our skilled bankruptcy attorneys can guide you through the complexities of the law and help protect your interests throughout the bankruptcy process.