Fraudulent Transfers Can Cause a Lot of Problems
When it comes to bankruptcy, many people, out of fear of losing property, decide to take matters into their own hands. They will transfer property, sell property, or give it away, in an attempt to make it look like they own less, or have fewer assets than they actually do. But that kind of thinking can lead to real trouble.
Not only is it a bad idea to start shedding property, but it may also be senseless, because a lot of the property that you own may end up being exempt in bankruptcy anyway. If you start giving property away or selling the things you own for nothing, you open up trouble in your bankruptcy case that you didn’t need to do in the first place.
What is a Fraudulent Transfer?
A fraudulent transfer is any transfer of property (meaning, a sale, or giving property away) that happens within one year of your bankruptcy petition. The sale must be made with the intent to defraud your creditors. Transfers that are made to “insiders,” that is, family members, friends or business associates, are often considered fraudulent. Additionally, transfers that are made for less than the market value of the property can be considered fraudulent.
People do sell property or assets for less than they’re worth all the time. That may even be common with financially strapped desperate consumers who may be looking for ways to pay their bills. But when is something just a bad deal, as opposed to being fraudulent in the eyes of a bankruptcy court?
Factors a Court Will Look At
There are factors a court will look at to make that determination. Were the parties at arms length—in other words, were they truly negotiating from opposite standpoints, with opposing interests? Giving property to your mom for a penny with the understanding you’ll get the property back when you need it would not be considered arms length.
Was there competition for the sale? In other words, did you “shop around” to get the best deal, or did you just sell the property to your business associate?
Penalties for Fraudulent Transfers
In serious cases, a fraudulent transfer can be seen as bankruptcy fraud, and you can end up in criminal trouble. In most cases, the bankruptcy trustee will try to “claw back” the property, taking it back from the “purchaser.”
If the purchaser is truly bona fide—that is, he or she had no idea what you were doing or why, and bought the property under the good faith idea that he or she was just getting a deal—the trustee may not be able to get the property back.
Whether the property is returned or not, a fraudulent transfer can end up getting your friends and family involved in your bankruptcy, or denying you a discharge completely.