Fraudulent Transfer

By Daisy Rogozinsky
/
June 13, 2022

Sometimes, bankrupt debtors will attempt to keep more property than they are legally allowed to when filing for bankruptcy. One way to do this is to execute a fraudulent transfer. In this article, we define “fraudulent transfer,” explain the two types of it, and outline the consequences one can expect if they are caught.  

Key Takeaways

  • A fraudulent transfer is the transfer of property by a bankruptcy debtor to another party in order to avoid paying debt
  • There are two types of fraudulent transfers: actual fraud and constructive fraud
  • Actual fraud is a transfer knowingly intended to defraud creditors 
  • Constructive fraud is a transfer for less than the equivalent value of the property when the debtor was insolvent - or they were rendered insolvent by the transfer
  • Badges are fraud are used to prove fraudulent transfers
  • In both types of fraudulent transfers, the bankruptcy court can render the transfer void and order the property to be returned

What Is a Fraudulent Transfer?

A fraudulent transfer, also called a fraudulent conveyance, is when a bankruptcy debtor transfers assets or property to another party in order to avoid paying debt.

Types of Fraudulent Transfers

There are two types of fraudulent transfers.

  • Actual fraud is when the transferor knowingly and intentionally transfers assets in order to hinder, delay or defraud a creditor.
  • Constructive fraud is when a debtor received less than a reasonably equivalent value in exchange for the property they transferred and either was insolvent at the time of the transfer or was rendered insolvent by the transfer.

In constructive fraud, the intention may not have been to commit fraud, but the consequences are the same.

Proving Fraudulent Transfers

Proving actual fraud can be challenging, so the bankruptcy court usually looks to something called badges of fraud to determine intent. Badges of fraud include things like:

  • Cash payments
  • Lack of accurate documentation supporting the transaction
  • Unusually fast transactions
  • Secrecy surrounding the transaction
  • Failing to disclose a transaction
  • Selling a property for less than the fair market value
  • Transferring assets to an insider such as a family member or close friend
  • Transferring the ownership of an asset to somebody else while keeping the property for yourself

For constructive fraud, courts look to several factors to determine whether or not the property was sold for a reasonably equivalent value, including:

  • The fair market value of the property
  • Whether the transfer was made in exchange for a promise of future business
  • Whether the transfer was made in the ordinary course of business
  • The value of other offers received for the same property

Consequences for Fraudulent Transfers

In order to catch potential fraudulent transfers, the bankruptcy trustee will review all transfers made within two years before filing for bankruptcy. There are also certain laws allowing bankruptcy trustees to look as long as four years back. For a self-settled trust, the period may increase to ten years.

If a debtor is found to have executed a fraudulent transfer, they can be sued by a creditor or the bankruptcy estate. If there is sufficient evidence to prove that fraud did indeed occur, the court can render the transfer void and order a return of the transferred money or property. They can also enter a money judgment against the debtor equal to the value of the asset transferred.

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