What is a fraudulent transfer? Did I do something wrong?
May 17, 2012 Leave a comment
I know that fraud sounds bad and fraudulent transfer sounds even worse. But his term is often used in and out of bankruptcy. (Sometimes it is referred to as a fraudulent conveyance). In your bankruptcy you may have gotten a notice that you are being accused of a fraudulent transfer by the bankruptcy trustee. Fraudulent transfer rules come from section 548 of the bankruptcy code. But don’t worry, this can be addressed in the bankruptcy and it does not mean that you are guilty of any crime or even that you are a bad person.
This is because they are not (usually) talking about you committing an actual, intentional fraud where you decided to de-fraud someone of their money or property. They are instead talking about a “constructive fraud” which is one where there is a law against doing these trnasfers but intent to do fraud is not there. Fraudulent intent is inferred from your actions.
The fraudulent transfer label is used most often when an asset/property has been transferred to someone else under circumstances that look suspicious. This could be real estate or personal property like a car or a piece of jewelry. In the bankruptcy context it occurs when you transfer an asset to someone else, you receive little or nothing in return, and you are insolvent at the time.
You may have had no bad intent at the time you transferred the asset so don’t worry. You may not even have thought that it was wrong. I have had clients transfer all kinds of things for many different reasons. You will need to disclose the transfer to your bankruptcy attorney and describe the circumstances surrounding the transfer any time you have transferred property before a bankruptcy.
And the look back period varies in different states but in California it is four years. So any property transferred to someone else in the last 4 years for less than its full value needs to be reported in the bankruptcy. Especially if that transfer leaves you insolvent which means that your liabilities are greater than your assets. This would not include a property sale to an outside buyer, especially to a buyer who pays full value. There is a much shorter “look back” period for these transfers and they are usually not questioned by the trustee.
The purpose of the fraudulent transfer rules in bankruptcy is to prevent people from moving assets out of their estate and then going bankrupt on the debts. Everyone would give their property to family members if they could and then get rid of their debts. After the case was concluded then they could take the assets back. This would not be fair to creditors and is not allowed so report these transfers to your attorney in a bankruptcy.
If you received a notification of a fraudulent transfer in a bankruptcy then the trustee could file or possibly has already filed what is called an adversary proceeding. An adversary proceeding is a complaint filed within a bankruptcy case that is objecting to some aspect of the case. A trustee will file one if there is a suspected fraudulent transfer of an asset. He will want to bring this asset back into the estate to sell it for the benefit of the creditors. (See here for more on adversary proceedings).
The problem here is that the trustee will seek to recover the asset from the person who received it. If the transferred asset has gone to your relative or friend then they would be drawn into the case so that the trustee could take the asset from that person. This person, the recipient of the asset, is not going to be too thrilled about this so this is a fairly serious problem.
As with all adversary proceedings this complaint must be answered. Even if no adversary has been filed you still need to contact an attorney to deal with this issue. Sometimes a settlement can be worked out but often the proper procedures must be followed timely or a judgment can occur for the entire asset. If this is a piece of real estate or and expensive piece of jewelry then this can mean a great loss of money if a settlement could have been worked out.
I am bankruptcy attorney in San Diego who handles adversary proceedings for both settlement and trial. Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics. Or call my office for a free consultation at (619) 702-5015. Call now for free credit report and analysis!
For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: email@example.com.