Defining a Fraudulent Conveyance in Bankruptcy

Defining a fraudulent conveyance in bankruptcy requires some general knowledge about the bankruptcy process, and the legal effect of a fraudulent transfer. Generally, a fraudulent conveyance is a transfer of the debtor’s property within a year of the filing of the bankruptcy petition, to hide or give away assets that could be used to pay off the debtor’s creditors. If the court determines that the transfer of property was a fraudulent conveyance, the trustee can then seize the property and it becomes part of the larger bankruptcy estate. Fraudulent conveyances are an important concept in bankruptcy because they prevent creditors from collecting their full entitlement amount from the debtor’s estate. 

Actual Fraud

Actual fraud is a transfer of some property one year before the date of the filing of the bankruptcy petition, and the transfer is done with the intent to hinder or defraud a creditor. It is hard to determine the intentions of the debtor; therefore, courts examine other factors to decipher the debtor’s intent. These factors include whether the debtor has a special relationship with the person the property was transferred to, and whether the debt essentially liquidated all her assets, leaving no assets in the bankruptcy estate.

Constructive Fraud

Constructive fraud is the transfer of property for inadequate consideration. To find constructive fraud the debtor must have received less than the reasonable value of the asset, and the debtor is unable to pay debts either at the time the transfer was made or as a result of the transfer itself. To show constructive fraud, the court focuses on the value the debtor received for the transfer. If the debtor receives nothing for the transfer, it is easy to prove constructive fraud. However, it becomes more complicated if the debtor receives less than fair market value for the transfer. The court considers whether the transaction was made in good faith during the ordinary course of business and between parties of independent interests. However, the debtor does not have to receive monetary value for the transaction. An exchange for adequate consideration can include future business opportunities. Courts become wary of transactions between family members that include no exchange of consideration. 

Getting Legal Help

Bankruptcy is a complicated legal process with long-term effects. If you have any questions about fraudulent conveyances or the bankruptcy process, contact an experienced bankruptcy attorney in your area.