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Archive for the ‘fraud’ tag

Prevent Fraud Challenges on a Credit Card Debt

October 12th, 2020 at 7:00 am


Very recent credit card purchases and cash advances can be a problem when filing bankruptcy. Smart timing can mostly solve this problem.

Last week’s blog post introduced the so-called “presumptions of fraud” in bankruptcy. Today we get into dealing with this issue through smart bankruptcy timing.

Bankruptcy Timing to Avoid the Presumption of Fraud

Here’s the key point: you greatly increase the risk that you’ll still have to pay a credit card debt if you file bankruptcy too soon after incurring that debt. You risk still having to pay the purchase(s) and/or cash advance(s) recently incurred. You may still have to pay that part of that credit card debt in spite of bankruptcy.

But you can avoid much of that risk by timing your bankruptcy right. The presumptions of fraud are in effect for only a relatively short period of time after you make the purchase or cash advance. You avoid the presumption of fraud simply by filing bankruptcy after that short period of time has passed.

The Presumption Period for Credit Card Purchases

The presumption period of time for purchases is 90 days from the time of each purchase. It only applies if the purchase(s) made within that 90-day period exceed(s) $725. (U.S Bankruptcy Code Section 523(a)(2)(C)(i)(I), with that $725 dollar amount valid from 4/1/19 through 3/31/21.)

So what happens if you file bankruptcy within 90 day after making a large enough credit card purchase(s)?

Maybe nothing bad would happen. The creditor may not challenge the discharge (legal write-off) of the debt on that purchase. Then bankruptcy would discharge that debt regardless when you made that purchase.

Or the creditor could challenge the discharge of that recently incurred portion of the debt. It could assert that you made the purchase within the 90-day presumption period before filing. The creditor could make this challenge in one of two ways.

First, it could contact your bankruptcy lawyer about its intent to raise this challenge. Or second, the credit card creditor could make the challenge directly in bankruptcy court. It would have its lawyer file a narrowly-focused legal proceeding asking that the debt not be discharged.

Your Response with Contrary Evidence

Either way, then you’d have a chance to push back. Just because your purchase(s) fall within the 90-day presumption period does not necessarily mean you’ll have to pay the debt. Remember that the whole debt is usually not at issue, only the purchase(s) made during the 90-day presumption period.

Beyond that, the presumption is just that and no more. It’s an initial presumption that you did not intend to pay the debt when you made the purchase. When you incur a debt you are promising to pay it. If you incur that debt without intending to pay it, the law treats that as a fraudulent misrepresentation. The law presumes that if you made a purchase within the presumption period you didn’t intend to pay it. The creditor can and likely will win on that presumption if you don’t push back.

But you can push back. You can respond, with your bankruptcy lawyer’s assistance, that you actually did intend to pay the debt on the purchase(s). First, you can simply testify that your honest intention at that time was to pay that debt. Then you can back that up perhaps by saying you were not intending to file bankruptcy at that time. You didn’t decide to file and write off the debt until after you made those purchases. You can even bring up what event(s) pushed you into deciding to file bankruptcy after making the purchases. (This all of course assumes that these facts are true.)

In other words, you can defeat the presumption of fraud with evidence of no fraud.

Then the creditor may be convinced and could back down completely, and withdraw its challenge. Or it can negotiate a settlement, with both parties agreeing that you pay something, less than the amount the creditor wanted. Or, both sides could stand fast and have the bankruptcy judge decide whether and/or how much you would pay.

The Presumption Period for Cash Advances

The presumption of fraud for recent cash advances works the same way as with recent credit card purchases. There’s just a tweaking of the details. The presumption period of time for cash advances is 70 days from the time of each cash advance. (Not 90 days.) It only applies if the cash advance(s) made within that 70-day period exceed(s) $1,000. (Not $725.) (Bankruptcy Code Section 523(a)(2)(C)(i)(II), with the dollar amount valid from 4/1/19 through 3/31/21.)

Everything stated above about how the credit card presumption of fraud for purchases works applies to cash advances too. Most importantly, the creditor has to raise the presumption or else it has no effect. And if the creditor does so, you still have the opportunity to refute and defeat the presumption. That is, you and your bankruptcy lawyer can present evidence that you had intended to pay the debt at the time you made the cash advance(s).

Bankruptcy Timing and These Presumptions of Fraud

Besides being able to defeat these two presumptions of fraud, you can usually avoid them altogether. You do so by waiting to file bankruptcy past the 70- and 90-day presumption periods.

Sometimes waiting is easy. But in many circumstances time is not on your side. You are   with pressure from creditors. You may have received a summons and complaint from a creditor. You may have your paycheck being garnished. Or you may have a vehicle at the risk of repossession or a home at risk of eviction or foreclosure.

Also, while you’re waiting to file bankruptcy bad things can happen that you don’t expect. The IRS or state tax authority may record a tax lien. A creditor lawsuit you don’t even know about could turn into a judgment against you. A creditor may try to take some other unexpected action against you or your possessions.

Deciding whether to delay filing bankruptcy to get past a presumption period is a balancing act requiring legal advance. It usually involves balancing several considerations and then making an informed choice about your best timing. You really cannot make the best judgment call on this without a bankruptcy lawyer’s thorough knowledge and experience.  

Beyond the Presumptions to Regular Fraud

Another reason that legal advice is necessary is that the presumptions of fraud are not the end of the story. The presumptions are a tool that gives credit card creditors a modest advantage. But creditors can certainly raise fraud and misrepresentation-based challenges without that advantage. This applies to credit card creditors and essentially all creditors. If a creditor believes that the facts bear this out, it can try to argue that you incurred its debt with bad intentions of various sorts. This can happen regardless that the debt was incurred longer than 70 or 90 days before your bankruptcy filing.

Without getting into this more here, the point is that avoiding the presumption periods doesn’t necessarily mean you’re safe. A person could certainly make a credit card purchase or cash advance 6 months before filing bankruptcy with no intent to pay that debt. Or whenever. If a creditor believes that you incurred a debt under fraudulent circumstances, whenever that happened, the creditor could raise a challenge.

Rest assured that these challenges—with or without the presumptions—do not happen in most bankruptcy cases. Your lawyer will help you anticipate any such challenges. Then he or she will give you advice to prevent and, if necessary, defeat any such challenges.


More Actions to Take When Considering Bankruptcy

June 22nd, 2020 at 7:00 am

If you’re considering filing bankruptcy, what debts can you incur and which should you avoid? What are the possible consequences?

Two weeks ago we listed 5 crucial things you’d benefit from learning about if you’re thinking about bankruptcy:

  1. if bankruptcy is indeed the best option for you
  2. how Chapter 7, 11, 12, and 13 work, and whether one is right for you
  3. what actions you should take to position yourself for either a possible or definite filing
  4. what you should avoid doing
  5. the best timing for your bankruptcy filing

We covered the first 2 of these back then. Then last week we got into # 3 and #4, actions you should take and those to avoid before bankruptcy. We focused on keeping, and not selling or giving up your:

  1. assets
  2. especially any retirement funds
  3. collateral on debts, such as your home, vehicles, or furniture

But there are many other actions that could be smart to take or to avoid as you’re contemplating bankruptcy. Consider the following questions. Should you:

  1. take on more debt to buy time and maybe avoid filing bankruptcy?
  2. file unfiled income tax returns and/or prioritize paying unpaid income taxes?
  3. catch up on late child or spousal support payments?
  4. file for divorce before or after filing bankruptcy?

We’ll cover the first of these today, the rest in upcoming blog posts.

Taking on More Debt

Taking on more debt can take many forms. Whether doing so is smart depends on which form it takes. It also depends on each person’s own circumstances.

Here are some of the most common forms:

  1. increasing unsecured debt from present creditor(s), such as adding to present credit card(s)
  2. getting new unsecured debt, such as accepting a new credit card offer
  3. getting new secured debt, such as buying a vehicle or furniture on credit
  4. increasing or getting new “priority debt,” essentially income taxes or child/spousal support

Let’s look at the first two of these today, involving increased or new unsecured debt.

Increasing Present Unsecured Debt

If the goal is to improve your financial situation, digging a deep financial hole deeper seldom works. It’s seldom a successful recipe for avoiding bankruptcy. But there may be exceptions.

Most of the time the decision to go deeper in debt is an act of near desperation. It’s generally not a well-thought out decision. You don’t have enough in your checking account to get something you need (or believe you need). So you put it on the credit card. You know it puts you further behind but you feel you don’t have much choice.

Or sometimes you do have a plan, or at least an attempt at one. You sit down (by yourself or with your spouse or a significant other). You look at your bills and the rest of your financial life and try to figure out what you should do about your increasing debt. You may tell yourself, for example, that you’ll keep on adding to your credit cards for no more than 2-3 more months. Until you get back to work, or into a better paying job, or until you pay off another debt and free up some cash flow. And if those things won’t happen then you’ll think about getting bankruptcy advice.

But whether you’re adding to your debt impulsively or following a plan, it’s really hard to know if you’re doing the right thing for yourself. It’s almost impossible to be objective because these are really personal, emotion-driving circumstances. There’s almost always a lot of fear and hope involved. Your self-esteem is on the line. And it gets crazy complicated if there’s a spouse or other loved one deeply involved. These are not good environments for making good decisions.

Getting New Unsecured Debt

The situation is similar if you have the opportunity to get a new source of unsecured debt. You wonder if it makes sense to transfer some of your current debt to the new source of credit. It may have a lower interest rate, or better payment terms, at least for the short term. Consolidating all or part of your unsecured debt seems to make sense. It looks sensible for the short term, and you hope it will help you make long term progress on your debts.

Or again, maybe you just can’t meet your expenses this month and feel you have no choice. So the new source of credit enables you to get by for another month or two.

Risk of Challenges to Discharge of a Debt

But incurring new debt can be risky ahead of filing bankruptcy. This is true if it’s additional debt on an existing account. The creditor could challenge the “discharge” (legal write off) of recently incurred debt in your bankruptcy case. The recent debt could be considered fraudulent. The argument would be that you incurred it without intending to pay it or any sensible ability to do so. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

That could be especially problematic if you are consolidating a lot of your debt with a new creditor or on a new account. Such actions could convert debt(s) that you could have legally discharged into one(s) you cannot.

Again, the larger the amount of the debt you recently accrue the greater this risk. The more that is at issue the more likely the creditor would raise the challenge. And of course the more the amount of the money the more you may still owe in spite of filing bankruptcy.

Rare Challenge to the Discharge of Any Debts

In certain (admittedly rare) circumstances taking certain actions before or during a bankruptcy could be even more dangerous. Lying on bankruptcy documents, hiding assets and such, could threaten your ability to discharge ANY of your debts. (See Section 727(a) of the Bankruptcy Code.)

 Incurring a significant amount of new debt soon before filing bankruptcy might also run you afoul of this provision.

The Best Pre-Bankruptcy Advice

It’s near impossible to know whether in your unique circumstances it make sense to incur a certain debt or not. As we said above, it’s hard not to act mostly out of hopes and fears—to be driven by such emotions. Even if you have the discipline to stop and try to figure things out, it’s still difficult to be objective.

Then if you do get your head and heart in the right place, you still don’t have information you need. Under what circumstances would incurring a new debt result in the creditor’s dischargeability challenge of that debt? What debt amounts and their timing would likely be okay and what would not? What debt actions by you would be acceptable and what would not?

The answers to these questions turn on your individual circumstances. The only source of the right answers to your truly unique questions is your bankruptcy lawyer.

Under the counsel of a lawyer, you’ll cut through the emotions to an objective analysis of your situation. You’ll get the information you need—the law as it applies to you—leading to answers to your questions. You’ll know better what debts you can incur and those you shouldn’t.


The Surprising Benefits: Fraud Debt Collections in Bankruptcy

July 16th, 2018 at 7:00 am

Being accused of defrauding a creditor is unusual in consumer bankruptcy cases. A creditor would have to jump through significant hoops. 


Most Debts are Discharged (Permanently Written Off) in Bankruptcy

The federal Bankruptcy Code has a list of the kinds of debts that are not discharged. This list details the conditions under which these kinds of debts don’t get discharged. (See Section 523 on “Exceptions to discharge.”)

Essentially, all your debts get discharged unless any of them fit one of the listed exceptions.

The Fraud Exception

One of the most important exceptions to discharge is the one stating that debts, “to the extent obtained, by… false pretenses, false representation, or actual fraud,” might not be discharged. (Section 523(a)(2)(A) of the Bankruptcy Code.)

This is an important exception to discharge because it could apply to many different kinds of debts. The other exceptions to discharge apply to very specific categories of debts. For example, these other exceptions include child and spousal support, various taxes, and student loans. But the fraud exception could apply to just about any debt if it was incurred in a fraudulent way.

What Makes for a Fraudulent Debt?

Your creditor would have to demonstrate that its debt should not be discharged because you incurred that debt fraudulently. If the creditor fails to do so the debt WILL get discharged and you’ll no longer legally owe it.  

To avoid discharge of the debt, the creditor would have to present evidence and prove EACH of the following:

  1. you made a representation
  2. which you knew at THAT time was false
  3. you made that representation for the purpose of deceiving the creditor
  4. the creditor relied on this representation
  5. the creditor was damage by your representation.

For example:

  1. a person gets a loan by representing that he or she has a certain amount of income
  2. while knowing that income amount was inaccurate
  3. with the purpose of fooling the creditor into making the loan
  4. resulting in the creditor relying on this income information in making the loan
  5. and losing money when the person didn’t pay back the loan

What Happens When a Creditor Alleges Fraud

Proving all five of these necessary elements often isn’t easy. So creditors tend not to object unless they believe they have a strong evidence of fraud. In the vast majority of consumer bankruptcy cases no creditors raise any fraud-based challenges.

When a creditor does raise such a challenge it does so in a specialized lawsuit in the bankruptcy court. This “adversary proceeding” usually focuses directly on whether the creditor can prove the five elements of fraud.

Such adversary proceedings almost always get settled. That’s because the amount of money at issue doesn’t justify the expense in attorney fees and other costs that can accrue quickly for both sides.  

Staying Allegedly Fraudulent Debts

The “automatic stay” imposed against virtually all creditor collection action also applies to allegedly fraudulent debts. If the creditor has alleged fraud prior to your bankruptcy filing, the filing will at least temporarily stop all collection on the debt. The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.”  (Section 362(a)(6) of the U.S. Bankruptcy Code.)

Then, as mentioned above, the debt will either get discharged or not. If the creditor doesn’t file an adversary proceeding in time, the debt DOES get discharged. If the creditor files an adversary proceeding but then doesn’t prove fraud, the debt is discharged.

On the other hand, if the creditor does prove fraud the debt is not discharged and the creditor can then pursue the debt. It gets a judgment stating that the debt is not discharged and collectible. Then the creditor can use all the usual collection methods to collect the debt.  

However, because these matters are usually settled, the settlement usually includes an agreed payment plan. So in the unlikely event that a creditor DOES allege fraud against you, files a timely adversary proceeding, AND convinces the bankruptcy judge that all the elements of fraud were present, you would still very likely have a workable way to pay the debt without worrying about being hit by unexpected collection actions.


Two More Creditor Challenges to the Automatic Stay

February 23rd, 2018 at 8:00 am

A creditor might want to pay a claim through your insurance, or finish a lawsuit to establish that you got the debt through fraud.  


“Relief from the Automatic Stay”

Our last blog post got into some reasons that creditors ask for “relief from stay” other than to repossess collateral.

The “automatic stay” is one of the biggest benefits you get for filing bankruptcy. It “stays”—legally stops—virtually all creditor collection actions right away when you file a bankruptcy case. The automatic stay protects you, your assets, and your income from creditors. It does so permanently in many circumstances.

But there are exceptions, when creditors can ask for permission to pursue a debt, and may get that permission.  So it’s important to know the circumstances in which a creditor would be able to get “relief from stay.”

Last time we explained two of those circumstances, allowing a creditor to finish a legal proceeding against you to determine whether you are liable on a debt, and if so how much you owe. Now here are two other circumstances where creditors may get “relief from stay.”

1. Getting Paid Insurance Proceeds  

When you file bankruptcy you get protection from creditors to which you are personally liable on a debt. But what if your liability is completely covered by insurance, such as with a vehicle accident? Or what if insurance would at least partially cover the amount of your liability?  

The money to pay the claim is not coming from your pocket but that of your insurance company. Should your bankruptcy filing affect your insurance company’s obligation to pay your liability up to the coverage limits?  Arguably not. An injured person may understandably believe your insurance company should pay your liability regardless of your bankruptcy filing.

But the person allegedly damaged by you can’t pursue you, your assets, or your income because of the automatic stay. However, he or she could file a motion asking the bankruptcy court for permission to pursue ONLY the insurance proceeds. The motion would make clear that the debt would be pursued only against your insurance coverage.  Assuming that the court would agree, it would sign an order granting “relief from stay” for the person to go after your insurance proceeds, but not against you in any other way.

Note that your insurance company likely has a “duty to defend” you in such a situation. So the insurance company and the allegedly damaged person, or their respective lawyers, would likely negotiate the matter. Most likely there would be no lawsuit. Or, if there would be one it would get settled and not go to trial. In the unlikely event that it would go to trial, your insurance company would pay to defend the lawsuit, and would pay out any damages up to the coverage limit. Any damages beyond coverage limits would very likely be written off—discharged in bankruptcy.

2. Determining Dischargeability of the Debt

Most types of debts can be discharged in bankruptcy. But there are quite a few exceptions. Some examples of exceptions are criminal debts, unpaid spousal and child support, recent income taxes, and many student loans. See Subsections 523(a)(1),(5),(8), (13), and (15) of the U.S. Bankruptcy Code.

But more conventional debts may also not get discharged based on how you incurred them. A debt incurred through fraud or misrepresentation usually can’t be discharged. See Subsections 523(a)(2) and (4) of the Bankruptcy Code. However, unlike the above exceptions of criminal and support debt, fraud-based debt IS discharged unless the creditor proves the fraud. Then if the creditor would allege fraud, you’d have the opportunity to dispute it.

The bankruptcy court usually decides such fraud-related disputes. But what if at the time of your bankruptcy filing there’s already a state court lawsuit addressing that question?

Just as with the insurance-based circumstance above, your bankruptcy filing would stop that lawsuit from proceeding. But then the creditor could ask for relief from stay to allow the lawsuit to go ahead.

The bankruptcy court might allow the state court to finish deciding whether the debt was incurred through fraud. Or the bankruptcy court might want to decide that issue itself.  Likely it would focus is which court would be more efficient than deciding this issue. And that would likely turn mostly on whether the state court was actually deciding the fraud issue (and not just whether you were merely liable in the debt) and on how close the state court was to a resolution.


Timing: Avoiding “Fraudulent Transfers”

October 4th, 2017 at 7:00 am

Giving a gift, or selling for less than true value, can cause problems when done before bankruptcy, but usually only if the amount is large. 


“Fraudulent Transfers” Are Uncommon

So-called “fraudulent transfers” do not come up in most consumer or small business bankruptcy cases. But they can sneak up on you. And if one does, it can be a real headache. So it’s important to know what it is, its crucial timing factors, and how to avoid it.

What’s a “Fraudulent Transfer”?

A fraudulent transfer is a reflection of human nature. If someone in financial trouble has an asset or money she wants to keep from her creditors she may be tempted to give it to someone so the creditors can’t reach it. Or she may be tempted to sell it for lots less than its worth.

The gift or sale may be to someone who would give it back later. Or the gift or sale may be to a friend or relative, keeping it within the debtor’s circle. The point is that the asset would no longer be available for her creditors to seize to pay the debts.

It’s human nature that if you have something valuable and are afraid of losing it, you hide it. You keep it from those who could take it. But that doesn’t mean this impulse is legal or moral. Because it’s an understandable impulse, there have been laws against it for at least 400 years in the English law we inherited.

The Results of a Fraudulent Transfer

So, a fraudulent transfer is a debtor’s giving away of an asset to avoiding paying creditors the value of that asset.

Under both federal and state fraudulent transfer laws if you give away something of value within the last two years, then your creditors could require the person to whom you gave that gift to surrender it to the creditors.

Legal proceedings to undo fraudulent transfers can happen both in state courts and in bankruptcy court. In a bankruptcy case, a bankruptcy trustee acts on behalf of the creditors to undo the transfer.

Actual and Constructive Fraudulent Transfers

There are two kinds of fraudulent transfers, based on either “actual fraud” or “constructive fraud.”

The one based on “actual fraud” happens when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” a particular creditor, or his or her creditors in general. (See Section 548(a)(1)(A) of the Bankruptcy Code.) The debtor is acting with the direct intent to keep the asset or its value away from creditor(s).

Fraudulent transfers based on “constructive fraud” happen in consumer situations most often when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange,” AND the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” (See Section 548(a)(1)(A) of the Bankruptcy Code.) With a constructive fraudulent transfer the debtor does NOT need to intend to defraud anybody. Yet the transfer can be undone if the right conditions are met.

Why Fraudulent Transfers Are Uncommon

There are three practical reasons why most people filing bankruptcy don’t have to worry about fraudulent transfers.

First, most people in financial trouble simply don’t give away their things before filing bankruptcy. They usually need what they have. Plus most of the time everything they do own is protected in bankruptcy through property “exemptions.” So there’s usually no reason to give away or sell anything.

Modest Gifts Are OK

Second, the bankruptcy system doesn’t care about relatively modest gifts. And most people considering bankruptcy don’t have the means to give anything but modest gifts.

By “modest” the bankruptcy system generally means a gift or gifts given over the course of two years to any particular person with a value of more than $600. The Bankruptcy Code does not refer to that threshold amount. But the pertinent official form that you sign “under penalty of perjury” does so.

The Statement of Financial Affairs for Individuals (effective 12/1/15) includes the following question (#13):

Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?

The next question (#14) is very similar:                                            

Within 2 years before you filed for bankruptcy, did you give any gifts or contributions with a total value of more than $600 to any charity?

The Trustee Has to Consider Collection Costs

The third practical reason there usually isn’t a fraudulent transfer problem is what it costs the trustee to pursue one. The trustee has to pay attorney fees and other expenses to try to undo a gift or transfer. Or the trustee has to use his or her time or pay staff to do this. So the practical threshold value of the transferred asset is likely many hundreds of dollars. The trustee is not going to pay a lawyer or use his or her time when the likely benefits outweigh the costs.

This is important because there is a question in the Statement of Financial Affairs without a stated threshold dollar amount. This question (#18) asks:

Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?

Notice the lack of a $600 minimum threshold found in the two questions referred to above. So, every applicable transfer must be listed here regardless of value.  But again, the bankruptcy trustee would likely not do anything about this unless the asset transferred was valuable enough to make the effort to undo the transfer worthwhile.


The trustee may be more inclined to try to undo a gift or transfer in one situation. If the trustee already has non-exempt (unprotected) assets to liquidate and distribute among the creditors, he or she may be more inclined to pursue a fraudulent transfer. That’s because then the trustee is not risking using his or her own money for the collection costs. The trustee knows there will likely be some money from liquidation of the non-exempt assets to pay those costs.


Resolving a Fraudulent Transfer Painlessly through Chapter 13

May 5th, 2017 at 7:00 am

If you owe “priority” debts like income taxes and/or support payments, you may be able to pay no more to protect a transferee. 


Let’s follow up on something we said in our last blog post two days ago. We showed how you can use a Chapter 13 “adjustment of debts” case to resolve a fraudulent transfer. Essentially, you pay extra into your Chapter 13 payment plan to make up for doing the fraudulent transfer. In the example we used, the debtor would pay a $225/month plan payment for about 22 extra months to make up for the $5,000 vehicle he or she’d had given away a year before filing bankruptcy.

But we ended that blog post by saying that under certain circumstances the results may be better. We show you how today.

Turning Lemons into Lemonade

Chapter 13 has a knack for solving two financial problems by setting them off against each other.

The first problem: the fraudulent transfer. You gave your friend your spare car a year ago because she desperately needed reliable transportation to commute to work. She now still needs it just as badly, so you don’t want a bankruptcy trustee to take it from her.

If you were insolvent at the time you gave it to her, the car could be taken under Chapter 7 “straight bankruptcy.” “Insolvent” simply means that you owed more in debts than you owned in assets. Then it wouldn’t matter that you gave her the car without any bad intentions towards your creditors.

So the solution we presented was to pay extra into your Chapter 13 plan to make up the difference. You in effect pay for the fraudulent conveyance. You double your generosity to your friend. After giving her the car earlier, you now pay its value over time so your friend can keep it. And you stay longer in your Chapter 13 case, delaying your fresh start. That’s awfully generous to your friend. Maybe too generous!

The second problem: you owe income taxes, or are behind in child or spousal support. Or you are behind on your mortgage and/or property taxes. Any and all of these problems could surprisingly help solve your fraudulent transfer problem.

How Owing Taxes/Support/Mortgage Payments Can Actually Help

Let’s say you owe $6,000 for 2016 federal income taxes and are behind $3,000 on child support. Neither can be written off in bankruptcy. These are also so-called “priority” debts, which must be paid in full in bankruptcy before anything goes to other debts.  

Let’s also say that you are $4,000 behind on your mortgage payments. Under Chapter 13 you are generally allowed to catch up on your mortgage before having to pay other debts.

These three special debts total $13,000. Assume you also owe an additional $75,000 in other debts: medical bills, credit and store cards, and personal loans.

Using the example used in the first paragraph above, let’s assume that you can afford to pay $225 per month into your Chapter 13 plan. Your income obligates you to do that for a minimum of 3 years, a maximum of 5 years. To pay the $13,000 at $225 per month will take nearly 58 months. (This excludes administrative expenses like trustee and lawyer fees, to simplify the calculations.)

This would leave nothing for the remaining $75,000 of debts. That means that those “general unsecured” debts would receive nothing—0%. In most bankruptcy courts that is allowed, as long as you genuinely can’t afford to pay any more than $225 per month.  

How This Solves the Fraudulent Transfer Problem

Chapter 13 law requires you to pay into your plan all that you can afford to pay for a certain length of time. For certain incomes it’s 3 years; for larger amounts it’s 5 years. Here we are assuming that the 3-year minimum applies.

In our example you are paying beyond the 3-year minimum in order to pay the three special debts. (The income tax, child support, and mortgage arrearage.) You can do so if you are indeed paying all you can afford, and finish within 5 years.

The Chapter 13 trustee will generally agree not to pursue the vehicle given through a fraudulent transfer if you agree to pay $5,000 beyond what you are legally obligated. That is what you are effectively doing here. You are legally obligated to pay for three years. However, you are paying nearly two extra years at $225 per month, essentially $5,000 extra. The fact that all this money is going to special debts—ones that you need and want to be paid—makes no difference.

The end result is that you kill two birds with one stone. You pay debts that must be paid (while being protected from their creditors).  You pay an “extra” $5,000 beyond the first 3 years, but that’s money you’d have to pay anyway. So those 4th and 5th years of payments both finishes what you need to pay to your special debts and prevents the trustee from chasing your friend for the car you gave her a year before filing.


The facts used in the example are no doubt different than your facts. And your facts may not fit so neatly into the lesson we are presenting. But the point is to show the possibilities. The point is also to show that the tactics involved tend to be quite sophisticated, especially when dealing with a complication like a fraudulent transfer. It should be very clear that the best solution for you will come through the counsel of an experienced bankruptcy lawyer.  


Preventing Avoidance of Fraudulent Transfers through Chapter 13

May 3rd, 2017 at 7:00 am

Overall, Chapter 13 can be more powerful and more flexible than Chapter 7. That often also applies to a fraudulent transfer. 


The Problem

Our last four blog posts have been about so-called fraudulent transfers. Today we look at a way to possibly avoid the hassles caused by a fraudulent transfer.

A fraudulent transfer is a sale or gift of an asset you made during the two years before filing bankruptcy case, a sale or gift  that can be undone (“avoided”) during your case. (See our post of Monday of last week introducing fraudulent transfers.)

Consider this example. A year before filing bankruptcy you gave a friend a second car you didn’t need and she desperately did. Now a year later, there is a good chance that your bankruptcy trustee could make her surrender that car. Under certain conditions the trustee would take it, sell it, and pay the proceeds to your creditors.

Your direct intention when you gave her the car a year ago could have been to keep that car from your creditors. Or you could have given her the car with no such intent, but instead only wanting to help your friend. However, even without any intent to hinder your creditors, the gift could be a trustee-avoidable fraudulent transfer.

Depending on your relationship to the person to whom you gave the car, you may not care what happens. But let’s assume you do care—a lot. She REALLY needs that car. You very much do not want a bankruptcy trustee to take it from her. You need to file bankruptcy to fix your financial situation, but you don’t want to risk her losing the car. You’re willing to do whatever is reasonable to resolve this problem.

Chapter 13 in General

One possible solution is to file a Chapter 13 “adjustment of debts” instead of a Chapter 7 “straight bankruptcy.” This is not the place to compare these two very different options in detail. Do that with your bankruptcy lawyer, if you haven’t already. If you’ve seen a lawyer and didn’t hear much about Chapter 13, it may be worth asking him or her specifically about it.

In general, Chapter 13 involves a payment plan spanning a period of three to five years. Before you decide that’s not right for you, be aware that it’s often much better than you’d expect. Chapter 13 provides significant advantages with many kinds of debts and certain asset situations. It is also usually better in solving the fraudulent transfer problem outlined above.

Paying to Protect Your Transferee

Chapter 13 is better with fraudulent transfers because it gives you more leverage and more flexibility.

Let’s use the example outlined above about the car you gave to a friend a year before you filed bankruptcy. Assume the car is worth $5,000. Assume also that if you filed a Chapter 7 case you giving away that car would qualify as a fraudulent transfer. The bankruptcy trustee would be able to take that car from your friend, sell it, and distribute the proceeds among your creditors.

How would that be different in a Chapter 13 case? Assume that under your budget you could afford to pay $225 per month to all of your creditors. Assume also that based on your income you would be required to pay into your plan for three years. So normally you’d pay $225 per month for three years.

But you really want to protect your friend and enable her to keep the car. Most Chapter 13 trustees would likely allow her to keep the car if you paid extra into your payment plan to make up for the money that selling the car would have gotten to your creditors. In our example you could continue paying the $225 per month beyond the required three years until you paid an additional $5,000. That would take about 22 extra months.  (We’re simplifying the calculations a bit by skipping some complicating details like trustee fees.)

The end result is that the trustee gets that extra $5,000 through payments from you instead of by selling your friend’s car.


The Bankruptcy Code that governs Chapter 13 cases is the same federal codified law all over the country. But bankruptcy judges and appeals courts, and even individual trustees, interpret these statutes differently. So, in your part of the country you may not be able to use Chapter 13 as outlined here. On the other hand, in certain circumstances the results may be even better. So talk with your local bankruptcy lawyer to find out what’s available with your court and trustee.


Are Charitable Gifts Fraudulent Transfers?

May 1st, 2017 at 7:00 am

Charitable donations made during the two years before filing bankruptcy may fall within a safe haven of not being fraudulent transfers.

The Quick Answer

To answer the question in the title directly, charitable gifts you make before filing bankruptcy COULD be fraudulent transfers. But they are not if they fit within a significant but limited exception that Congress has carved out for legitimate charities.

A Very Helpful Exception

This is important. Your bankruptcy trustee has the power, under many circumstances, to require someone you gave a gift to within the two years before filing bankruptcy to return the gift, not to you but to the trustee for distribution to your creditors. Imagine a friend, relative, your church, or other charity being ordered to return whatever money or goods you donated! Instead of your good intentions being realized, that money is used to pay the debts you’d hoped to write off.

Our last three blog posts discussed fraudulent transfers, including innocent ones. Generally, giving away something and get nothing, and do so while you’re insolvent (owe more than you own), that’s a fraudulent transfer.  The trustee can force the recipient to return the gift, but not if the gift qualifies for the charitable contributions exception.

The Elements of the Exception

To qualify for this exception the gift must:

  • consist of cash or financial instruments (stocks, bonds, options, and such)
  • be made by a “natural person”
  • be given to a “qualified religious or charitable entity or organization” under certain provisions of the Internal Revenue Code
  • either be not more than 15% of the debtor’s gross annual income during the year of the gift(s), OR, if more than that, “the transfer was consistent with the practices of the debtor in making charitable contributions.”

See Section 548, subsections (a)(2) and (d)(3) and (4) of the Bankruptcy Code.

These elements are mostly self-explanatory but are worthy a bit more explanation.

Cash and Gifts

When you think of donating assets, you may not immediately think of cash contributions. But cash or money in your checking account are certainly assets. They can be the stuff of a fraudulent transfer like any other asset. So cash contributions need to fit this exception to prevent the bankruptcy trustee from going after them.

The Statement of Financial Affairs is one of the main documents you and your bankruptcy lawyer prepare and file. Its question 13 asks: “Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?” Its question 14 asks the same about “gifts or contributions” “to any charity?” If you answer “yes” to either one you need to provide details like the recipient’s or charity’s name and address, what and when you gave, and the value. So, cash and gifts are fully covered.

Natural Persons

This charitable contributions exception only applies to people, not to corporations or other business entities.

However, if you own a sole proprietorship that is not a separate legal entity and can’t file its own bankruptcy. Your business and personal debts and assets are all together, not legally distinct. So, the business’ charitable contributions are effectively contributions by you, a qualifying natural person.

Qualified Religious or Charitable Organization

Money given to help support a friend or a relative, one to whom you owe no legal obligation of support, does not qualify.

Nevertheless, frankly, practicalities may very well prevent a trustee from bothering to pursue such a friend or relative. The person may be very difficult to collect from if the money is gone and he or she is insolvent. A trustee has to seriously consider what it would cost to collect the money and the risk of never collecting. Often the money is not worth pursuing.

15% or “Consistent with the Practices of the Debtor”

Relatively few people in financial trouble have been lately donating anywhere close to 15% of their gross annual income to charity.  And even in the rare circumstances when they do donate more, those donations still qualify if making such donations reflected the debtor’s charitable giving practices.  Except in very unusual circumstances would this element disqualify any charitable donations from the exception.


Most payments in cash and financial instruments to genuine charitable organizations will not be fraudulent transfers. However, if you’ve made any significant charitable contributions in the last two years, review them carefully with your bankruptcy lawyer. Given the very awkward consequences if they don’t qualify for the exception, you want to make sure.


Fraudulent Transfers without the Actual Intent to Defraud

April 28th, 2017 at 7:00 am

Selling or giving away something innocently, without trying to hurt your creditors, could still give the trustee the right to get it back.


“Fraudulent Transfers” without Bad Intentions

It’s confusing: so-called “fraudulent transfers” don’t have to be fraudulent. They can be innocent of any bad intentions by you, the debtor.

In our last blog post we got into “fraudulent transfers” that DO come with bad intentions. Those involve the giving away or sales of assets WITH the “actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.) Basically, we’re talking here about hiding or disposing of assets to prevent the paying of debts. “Fraudulent transfer” law allows the bankruptcy trustee to undo, or “avoid,” that gift or sale. The person who got the asset from the debtor before bankruptcy has to give it to the trustee, and then to be distributed to the debtor’s creditors in bankruptcy.

It’s understandable why assets that were fraudulently hidden from creditors should be made available to them. But should same thing happen when the sale or gift was innocent of any bad intentions towards creditors?  The law says “yes,” under certain circumstances. Today we get into those circumstances.

The Two Main Conditions for “Constructive Fraudulent Transfer”

Let’s say you have a second vehicle that you don’t need. So a year before filing bankruptcy you sell that asset and get paid what it’s worth. Then you use the proceeds of that sale to pay living expenses. Selling that vehicle is fine because you got fair market value for that vehicle.

Or let’s say you have that vehicle, but now you give it to a friend without getting anything for it. But at the time you are and continue to be solvent: you have more assets than debts. You file bankruptcy a year later because of a serious accident and huge medical bills that made you insolvent. That earlier giving away of the vehicle is fine because of your solvency at the time. You could do whatever you wanted with your assets a year earlier because then you had more assets than debts.

“Less Than Reasonably Equivalent Value” and “Insolvent”

But now let’s say you didn’t get anything for the vehicle at the time you were already insolvent. You weren’t intending to prevent your creditors from getting at the vehicle. You made no connection in your mind between that vehicle and your debts. You were just helping your good friend who needed a reliable car to get to work. Then you file bankruptcy a year later. That giving away of the vehicle is likely a constructive fraudulent transfer.

The law essentially says that regardless of your intentions, you shouldn’t be giving away assets when you have more debts than you have assets. The law says you should know better. And regardless of your intentions, your creditors should later be able to get at the value of that given-away vehicle. In bankruptcy, the trustee, standing in for the creditors, may well have a right to get that vehicle from your friend, sell it, and pay the proceeds to your creditors.


Fraudulent Transfers with Actual Intent to Defraud

April 26th, 2017 at 7:00 am

Selling or giving away something to prevent your creditors from getting it may make a certain amount of sense but could be very dangerous. 


Good and Bad Intentions

Last time we introduced “fraudulent transfers.”  We said that in spite of how the term sounds, a fraudulent transfer does not necessarily happen with bad intentions. You could innocently sell or give something away during the two years before filing bankruptcy. That could still be a fraudulent transfer, as long as that sale or gift satisfied a number of conditions.

However, a fraudulent transfer CAN come with bad intentions. Today we cover those made “with actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.)

Hiding Assets from Creditors

We can generally agree that in normal circumstances legally owed debts ought to be paid. The law backs this up with legally established procedures for collecting debts. Some of those procedures are centuries old. The law of fraudulent transfers is one of those. It goes was back to the Fraudulent Conveyances Act of 1571 in England, nearly 450 years ago.

A fraudulent transfer is basically a debtor’s selling or giving away of an asset to prevent a creditor from using it to get paid. When done with actual intent, it typically involves a debtor who gives away assets—or sells them for a very low price—as part of a scheme to leave himself with nothing to pay his creditors.

“Avoidable” by the Bankruptcy Trustee

The remedy for a fraudulent transfer involves undoing the transfer, selling the asset transferred, and using the sale proceeds to pay debts of the person involved in the fraudulent transfer.

This can happen outside a bankruptcy case. Most states have fraudulent transfer laws that allow creditors to undo a transfer when certain conditions are met.

But in bankruptcy cases the bankruptcy trustee acts on behalf of all the creditors. If the trustee succeeds in “avoiding” the transfer, he or she sells the asset and pays the creditors according to a detailed priority arrangement laid out in the federal bankruptcy law.


We have been referring to sales or gifts of assets, but the term “transfer” is very broad. It includes, among others:

each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property.

A transfer can also consist of the creation of a lien on an asset. (See Section 101(54) of the Bankruptcy Code for the meaning of “transfer.”)


To make better practical sense of this, here are a couple examples of fraudulent transfers done with actual intent.

A year ago you had two free and clear vehicles in your name. You learned that under the laws within your state you could “exempt,” or protect, only one based on their value. So to keep it away from your creditors, you signed one vehicle over to your 22-year old son. He didn’t pay anything for it. You’ve now filed a Chapter 7 bankruptcy to discharge all of your debts. The transfer of the vehicle’s title was an intentional act to prevent your creditors from being paid. The bankruptcy trustee would likely have the right to require your son to give him or her possession and title of the vehicle. The trustee would then sell it and pay the proceeds to your creditors.

You and your two siblings inherited a beach house from your parents. You have serious debt problems. You don’t want your share of this property to go to your creditors. So you and your siblings put the property into a family trust. When you file bankruptcy 18 months later, this transfer intended to prevent your creditors from being paid could be considered a fraudulent transfer. Your siblings would likely have the right to pay the trustee for your share of the property. Otherwise, the property might need to be sold to give the trustee the value of your share.


While it’s understandable that you would want to protect something from your creditors, it’s clearly dangerous to try to do so without legal advice. There are often ways of meeting your goals in a legal way. The asset in question may be “exempt” and already protected. It may make sense to sell it and use the proceeds in a legally appropriate way. You may well be able to protect it through a Chapter 13 case. There can be any of a number of practical solutions. Discuss the situation thoroughly with your bankruptcy lawyer, before you make the transfer. You are much more likely to meet your goals and avoid the headaches of a fraudulent transfer.


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