Fraudulent Transfers
- If a debtor makes a fraudulent transfer within two years before the filing of a petition, the trustee may be able to avoid and recover the transfer. Please keep in mind, the trustee may have even have the power to reach back in time to more than 2 years before filing, for certain types of fraudulent transfers.
- If you are tempted to give your property to friends and/or relatives just before filing in hopes of getting it back after you file – Don’t Do It!.
- If you are tempted to sell your property to friends and/or relatives for a nominal amount (a few dollars) before filing in hopes of getting it back after your case is closed – Don’t Do It!
- If you are tempted to take your name off of a joint account or maybe a deed or a vehicle title before filing in hopes of the trustee not finding the transfer – Don’t Do It!
WHAT IF I DID MAKE THE TRANSFER: It may be a good idea to wait until a certain amount of time has passed before filing for a Chapter 7 Bankruptcy. How long to wait will probably depend on the type of transfer that was made, but the most general answer is at least 2 years.
CAN I UNDO THE FRAUDULENT TRANSFER: Life should not be this difficult!
The bankruptcy trustee has avoidance powers. If a debtor is shifting property around or transferring property just before filing for bankruptcy, the bankruptcy trustee has the power to take the property back from the person to whom it was transferred. When the bankruptcy petition is filed, property transfers at least within the 2 years before filing must be disclosed. However, there is nothing wrong with a legitimate transfer of property before filing for bankruptcy (i.e., sell of a car for market value). If you have transferred property that might be considered as fraud by the trustee, the best way to handle this may be to wait at least 2 years before filing for bankruptcy.
Paying Off a Preferred Creditor – “Preferences
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Insider: The theme in bankruptcy law is for all creditors to be treated fairly in comparison to each other. If you have paid off a creditor who is a relative, friend, or business partner/associate (insiders) within 1 year of filing for bankruptcy, and left the other creditors on the hook, then the trustee may investigate that transaction if you were insolvent at the time. Insolvent means your liabilities are greater than your assets. These are preferences and are made most of the time without an actual intent to defraud creditors. At the worst, the trustee could reverse the transfer – take the money back from whoever got it. If you paid more than $600 to the preferred creditor insider, this could be a red flag for the trustee, if that creditor received more than it would have gotten in a Chapter 7 liquidation case and the transfer occurred within 1 year of filing. The bankruptcy court likes to see your mother who loaned you the money and Discover Credit Card treated the same.
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Not An Insider: If the person or company you have paid off or attempted to pay off before bankruptcy is not an insider, just a regular creditor, then the court will only be concerned with what you did 3 months before you file for bankruptcy. If your debts are mostly business debts, then the rules are even more relaxed. If you paid more than $600 to the preferred creditor, this could be a red flag for the trustee, if that creditor received more than it would have gotten in a Chapter 7 liquidation case and the transfer occurred within 90 days of filing.
In many cases the trustee will not pursue a preference unless the transfer is a lot more than $600. However, the order of concern would run like this:
- transfers to insiders for more than $600 within 1 year of filing – some concern depending on amount.
- transfers to non-insiders (regular creditors) for more than $600 within 90 days before filing – not as concerned depending on amount.
Gregory Kornegay,
