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Archive for the ‘fraudulent transfers’ tag

Fraudulent Transfers Around the Holidays

November 26th, 2018 at 8:00 am

Giving a gift, including selling for much less than an asset is worth, may be a fraudulent transfer—treated as hiding assets from creditors.

 

Most people filing bankruptcy have neither a need nor the desire to hide anything from their creditors. There’s no need because most people’s assets are already protected through state and federal laws. There’s no desire because most people are honest and want to follow the law.

Yet anybody considering bankruptcy should still have some understanding of the law of “fraudulent transfers.” That’s because it could cause you problems even if you thought you were being honest and fair. As you’ll see this may more likely happen during the gift-giving holiday season.

“Fraudulent Transfers” Explained

A “fraudulent transfer” is essentially a debtor giving away—transferring—an asset to avoiding giving creditors that asset’s value. This can be done with bad intentions, but also without any such intentions.

If you give away something (for example, as a holiday gift), or sell something for much less than it’s worth, then under certain circumstances your creditors could require the recipient to surrender it to the creditors. That would usually not be a good result because you’d prefer that the person be able to keep your gift.

The gift or sale in a “fraudulent transfer” can be challenged in either state courts or bankruptcy court. In a bankruptcy case the bankruptcy trustee would act on behalf of the creditors to “avoid” (undo) the transfer.

The Two Kinds of “Fraudulent Transfers”

There are two kinds of fraudulent transfers.

The one based on “actual fraud” requires the actual intent to harm a creditor or creditors. It occurs when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” one or more creditors. Section 548(a)(1)(A) of the U.S. Bankruptcy Code.

The one based on “constructive fraud” does not require the actual intent to harm a creditor. It occurs when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange, in which the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” Section 548(a)(1)(B) of the Bankruptcy Code. Although the debtor does not intend to defraud anybody, the transfer can be undone under certain circumstances.

Legal and Practical Considerations

Most people filing bankruptcy will not be accused of a fraudulent transfer for a number of reasons:

1) Most people simply don’t give away their assets leading up to filing bankruptcy.

2) Gifts to charities are largely exempt.

3) The bankruptcy system doesn’t care about minor gifts or transfers.

4) Even in circumstances that a transfer could be challenged, the trustee has to consider the cost and practicality of undoing the transfer.

1) Debtors Don’t Generally Give Away Assets

Most people considering bankruptcy usually need pretty much everything they own. So they aren’t going to be giving it away or selling it for less than it’s worth.

Furthermore, the assets that people own when filing bankruptcy are usually fully protected. So there’s no motivation to transfer them away.  These protections are usually through property “exemptions,” or through the special advantages of the Chapter 13 “adjustment of debts.”

2) Gifts to Charities Are Essentially Exempt

The Bankruptcy Code creates a big exception for transfers made “to a qualified religious or charitable entity or organization.” Charitable contributions are exempt if they do “not exceed 15 percent of the gross annual income of the debtor.” The amount of contributions can total an even higher percentage “if the transfer was consistent with the practices of the debtor.” Section 548(a)(2).  

3) Minor Gifts Are Not a Problem

The bankruptcy system doesn’t worry about relatively minor gifts or transfers. This effectively means a gift or gifts given over the course of two years to any particular person valued at $600 or less. The Bankruptcy Code itself does not refer to that threshold amount. But the Statement of Financial Affairs for Individuals, which is one of the official documents you and your bankruptcy lawyer prepare and file at court does so.

This document 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?

4) Cost and Practicality of Avoiding the Transfer

Even when a gift or other transfer arguably qualifies as a “fraudulent transfer,” the trustee has to seriously consider the costs in attorney fees and other expenses to try to undo that gift or transfer. At the very least the costs have to be weighed against the amount likely to be gained for the creditors.

This is particularly true when there’s a meaningful risk that the transfer would not qualify as a “fraudulent transfer.” Or the transfer may qualify but the transferee has disappeared or a judgment against him or her is uncollectable.

 

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.

Caution

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.

Conclusion

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.

Caution

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.

 

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.

“Transfer”

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.”)

Examples

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.

Conclusion

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.

 

Introducing Fraudulent Transfers

April 24th, 2017 at 7:00 am

“Fraudulent transfers” have similarities to “preferences.” They are both worth understanding because they can cause unnecessary hassles.  


Asset Timing in Bankruptcy

Your Chapter 7 trustee usually mostly focuses attention on determining whether any of your assets are not “exempt.” You get to keep all exempt assets. If there are any assets that are not exempt, the trustee has the right to take them, liquidate them, and pay the proceeds to your creditors. However, in most consumer Chapter 7 cases all the assets are exempt so the trustee takes nothing. The debtor gets to keep everything.

In this process, the trustee is only interested in what you own at the moment you file your bankruptcy case. This timing gets quite precise. For example, what counts is the amount of actual cash you have on hand at that moment of bankruptcy filing. Same thing with the balance in your checking account(s) at that moment, and all your other assets. The amount of cash or money in your accounts the day before or the day after usually doesn’t matter. What matters is what you had at the moment of filing, with these and all your other assets.

Exceptions: “Preferences” and “Fraudulent Transfers”

This fixation on assets at the moment of filing has a few significant exceptions. We just spent our last six blog posts discussing “preferences.”

The law of preferences allows a bankruptcy trustee to get at something you owned BEFORE filing your Chapter 7 case. That “something you owned” is the money (or some other asset) with which you paid a debt during the 90-day (or sometimes the 1-year) period before filing bankruptcy. See Section 547 of the U.S. Bankruptcy Code. Under limited circumstances the trustee can recapture that payment, requiring the creditor to give that payment to the trustee. The trustee essentially undoes, or “avoids,” that payment. The trustee then uses the money turned over by that one creditor just like any other available debtor asset. The money is paid out to your creditors according to a detailed set of priority rules.

The law of fraudulent transfers is ANOTHER way for a trustee to get at something you owned before your bankruptcy filing. But a fraudulent transfer involves assets you sold or gave away, instead of payments you made to a creditor. The sale or transfer can be to anyone. The look-back time period is much longer—a full two years before filing, and sometimes can be longer. See Section 548 of the U.S. Bankruptcy Code. If the trustee succeeds in undoing, or “avoiding” the transfer, there’s essentially the same result as with any other available debtor asset. The trustee sells that asset and distributes the proceeds according to the same set of priority rules just mentioned above.

Voluntary/Involuntary, Good/Bad Intentions

In the last few blog posts we’ve shown how a preference payment to a creditor can be voluntary or involuntary. That is, you may make that payment freely, with full intention. Or the creditor may force it from you through a garnishment of your paycheck, or some other aggressive collection method. You may be intentionally favoring one creditor over your others, or may have no such intention. All these kinds of payments can qualify as a preference, if they meet some timing and other conditions. The trustee may have a right to “avoid” the payment and make the creditor give up the money.

A so-called fraudulent transfer is one that you do more or less voluntarily. You generally sell or give away your assets by choosing to do so, even if you might wish you didn’t have to. And in spite of the word “fraudulent,” a fraudulent transfer absolutely does not require bad intentions. Innocently selling or giving something away during the two years before filing bankruptcy may be a fraudulent transfer. All it takes is satisfying a number of timing and other conditions.

The Purpose of Fraudulent Transfer Law

This power in bankruptcy to undo a sale or gift is intended to keep the system fair and honest.

By “fair” we mostly mean fair between you and your creditors. Bankruptcy is mostly about debts and assets. In most consumer Chapter 7 cases, all or most of your debts get written off. And you get to keep all of your assets because they are protected, or exempt. But the system still gets to review your assets carefully to determine if you have anything that is not protected, and should be liquidated to pay your creditors. Part of that focus on assets is this power to look back at two years of asset transfers.

But why do “innocent” sales and gifts of assets get included? If the system is trying to discourage keeping assets away from your creditors, if that wasn’t your intention why might your sale or gift still be a fraudulent transfer? It’s because the law in this arena tries to be fair regardless of intention. We’ll show you what this means in the next couple blog posts.

Most Consumer Bankruptcy Cases Have No “Avoidable” Fraudulent Transfers

Let’s keep this all in perspective. There are a number of conditions for a sale or gift to meet to be considered a fraudulent transfer. Most consumer Chapter 7 cases do not involve a trustee trying to undo prior sales or gifts. That’s because in most cases the transfer doesn’t meet the necessary conditions. Or if the conditions are technically met the transfer is not worth for the trustee to “avoid” for practical reasons.

In the upcoming posts we will get into the conditions that create a fraudulent transfer. There are basically two kinds—intentional and unintentional. We’ll start next time with the kind involving the “actual intent to hinder, delay, or defraud” creditors. Section 548(a)(1)(A) of the Bankruptcy Code. 

 

Recovered Assets from “Fraudulent Transfers”

December 5th, 2016 at 8:00 am

Which assets that you sell or give away before filing bankruptcy will be a problem, and which won’t?

 

“Fraudulent Transfers”

Our last blog post explained why the bankruptcy system may be interested in what you sold or gave away before filing bankruptcy. It’s about you not being allowed to avoid paying creditors by hiding assets. So, assets you sold or gave away within 2 years before filing bankruptcy might be subject to recovery by your trustee for the benefit of your creditors.

We ended the last blog post by emphasizing this only happens in certain circumstances. Today we get into those circumstances.

Selling and Giving Away Assets Is Often Fine

Let’s be practical and sensible about “fraudulent transfers.”

In many circumstances it’s not a problem to sell some stuff you own during the period before filing bankruptcy. It’s perfectly fine to sell anything you own for sensible purposes. For example, it’s no problem to sell something you own to raise money to pay creditors or living expenses.

You just need to get paid a reasonable amount in the transaction. You must be paid “a reasonable equivalent value in exchange” for what you sold. (Section 548(a)(1)(B)(i) of the Bankruptcy Code) That means garage sale prices in a garage sale, reasonably close to blue book value for a vehicle, etc.

It’s even okay to give away assets, although that’s a bit trickier. You can give away stuff that effectively has no “reasonable equivalent value in exchange.” That means that the only practical way to get rid of it is to give it away.

If you’re giving away to charity, you have more flexibility. As long as you are giving to “a qualified religious or charitable entity or organization” you can give assets worth up to 15% of your gross income that year. (Section 548(a)(2)(A)) You can even give more “if the transfer was consistent with the practices of the debtor in making charitable contributions.” (Section 548(a)(2)(B))

So when does selling and giving away assets turn into a fraudulent transfer?

Actually Fraudulent “Fraudulent Transfers”

You can’t sell or give away assets “with actual intent to hinder, delay, or defraud” your creditors. (Section 548(a)(1)(A)) You can’t purposely hide your assets from your creditors by getting rid of the assets. Call this intentionally fraudulent transfer. These are relatively rare, in part because such “actual intent” is hard to prove.

NOT Actually Fraudulent “Fraudulent Transfers”

Even without any such fraudulent intent, a constructive “fraudulent transfer” can happen. It usually takes two conditions:

  • You get “less than a reasonably equivalent value in exchange for such transfer or obligation.” There isn’t necessarily any evidence that your sale or gift was done to hide the asset from your creditors. But you didn’t get paid what the asset being transferred was worth. (Section 548(a)(1)(B)(i))
  • You are insolvent at the time of this transfer. Or the transfer makes you insolvent. (Section 548(a)(1)(B)(ii)(I)) “Insolvent” means the value of all your debts is more than the value of all your assets. (Exclude “exempt” assets from this calculation—assets that are protected from your creditors.) (Section 101(32)(A))

The point is that if you shouldn’t be selling or giving away an asset without getting paid enough for it—in money or in anything else of value—when you’re in the red. You shouldn’t be in effect giving away assets that you should instead pay to your creditors. And if you do and within two years thereafter you file bankruptcy, your trustee could try to undo that transfer, sell that asset, and distribute the sale proceeds among your creditors.

(There are 3 other very specific circumstances that can result in a fraudulent transfer. But those are rare and beyond what we can cover in this blog post. ((Section 548(a)(1)(B)(ii)(II, III and IV))

Conclusion

Fraudulent transfers are one of the more complicated concepts in bankruptcy. These last two blog posts have just given a very basic overview. One of the key benefits of working with highly competent bankruptcy lawyer is that these kinds of potential problems can be found, discussed, and resolved to your advantage.

 

Assets Recently Sold or Given Away

December 2nd, 2016 at 8:00 am

Your assets can include property and possessions that you have sold or given away before filing bankruptcy.

 

Your Assets in Bankruptcy

In our last blog posts we got into two special kinds of assets: inheritances and assets you own with someone else. There are special rules and considerations with these unusual assets.

Today’s blog post is about something that may seem even more unusual—assets you used to own but now don’t.

For most purposes the bankruptcy system looks at your financial life now, not in the past. Chapter 7 “straight bankruptcy” picks the date of filing as the point in time to focus on. So does Chapter 13 “adjustment of debts”, while also looking at your financial life during the 3-to-5-year period it lasts.

But bankruptcy can also look backwards at assets you owned before filing the case, in very limited circumstances. Today we look at so-called “fraudulent transfers.” Spoiler alert—your actions don’t necessarily need to be fraudulent to make a “fraudulent transfer.”

The Point of “Fraudulent Transfers”

If you sell or give away some of your assets during the two years before filing bankruptcy, what you sold or gave away can sometimes be brought back into your bankruptcy case.

What’s the point of this ability to reach backwards in time?

One of the key principles of bankruptcy involves the fair distribution of a debtor’s assets to the creditors. In other words, in bankruptcy creditors are entitled to receive payment (usually only partial payment) through the collection and sale a debtor’s assets, to the extent the law allows.

But this principle applies in a practical way only when you have assets that the law allows to be distributed among your creditors. In most consumer Chapter 7 cases, there is no such distribution to creditors. That’s because all of the debtor’s assets are “exempt,” protected for the debtor’s benefit from the creditors. There is no taking of any of your assets for distribution among your creditors.

But the principle of fair treatment of creditors remains. Here’s how it comes into play with “fraudulent transfers.”

The bankruptcy court sometimes has jurisdiction not only over assets that you own when the case is filed, but also over assets you previously sold or gave away under certain circumstances.  The purpose of this is very practical. It’s intended to discourage debtors from unfairly disposing of assets before filing bankruptcy. It’s to discourage debtors from, in effect, hiding assets from creditors. And if a debtor does dispose of assets, the purpose of “fraudulent transfer” law is to bring back those assets for the benefit of the creditors. Again, this bringing back of sold or given away assets happens only under certain limited circumstances.

Sorry to keep you in suspense but in our next blog post on Monday morning we’ll tell you about those certain limited circumstances.

 

Bankruptcy Timing and the Holidays: Gift-Giving and “Fraudulent Transfers”

December 18th, 2015 at 2:00 am

Gift-giving, or selling for much less than actual value, can cause problems ahead of bankruptcy, but only if it’s a large gift.

 

“Fraudulent Transfers” Usually Not an Issue

This blog post is about a topic to be aware of but one that’s seldom an issue for consumers or small business owners filing bankruptcy. However, in part because “fraudulent transfers” often involve some version of gift-giving, it’s particularly worth getting an understanding of this during the holiday season.

We’ll briefly explain here what a “fraudulent transfer” is, its two different forms, why neither are a problem for most people, and when you should be concerned.

What’s a “Fraudulent Transfer”?

Basically, it’s a debtor’s giving away (transferring) an asset to avoiding paying creditors the value of that asset.

This legal concept was first addressed more than 400 years ago in English law, which we adopted, so this is an issue that’s been around for a long time.

More precisely, under federal and state fraudulent transfer laws if you give away something (including potentially as a holiday gift), then under certain circumstances 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 bankruptcy court. When in a bankruptcy case, a bankruptcy trustee acts on behalf of the creditors to undo the transfer.

The transfer can be an outright gift or it can be a sale in which the asset is sold for much less than its value.

Actual Fraud and Constructive Fraud

Actual fraud happens when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” one or more creditors. (See Section 548(a)(1)(A) of the Bankruptcy Code.)

Constructive fraud happens most often in the consumer context when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange, in which 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.) Very importantly, with a constructive fraudulent transfer the debtor does NOT need to intend to defraud anybody, and yet the transfer can be undone if the required circumstances are present.

Why This Is Usually Not a Problem

There are practical reasons why most people don’t have to worry about having engaged in fraudulent transfers before filing bankruptcy.

First, most people simply don’t give away their possessions before filing bankruptcy. They generally need most everything they have. What they do own is usually protected in bankruptcy through property “exemptions,” so there’s usually no motivation to give away anything.

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?

And the third practical reason that there usually isn’t a fraudulent transfer problem is that, given what it costs in attorney fees and other expenses for a bankruptcy trustee to try to undo a gift or transfer, the practical threshold in most cases is likely at least as high as $600 in value of the transferred asset (and likely more) regardless how the questions in the bankruptcy documents are worded.

Accordingly, even when the same form also asks a question about transfers other than gifts which does NOT have a stated dollar threshold, in most cases a trustee would not pursue a transfer unless the anticipated money from undoing the transfer would outweigh the anticipated costs. This question without a threshold dollar amount (#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?

Every applicable transfer must be listed here, but again the trustee would generally not do anything about it unless its value made the effort worthwhile. That does depend on the circumstances. For example, if the trustee already had non-exempt assets to liquidate and distribute among the creditors, he or she may be more inclined to pursue a gift or transfer.

Conclusion for the Holidays

The point is that modest gifts and transfers are not the target of this law.  So fraudulent transfers are not an issue in most consumer and small business bankruptcy cases.

But if anything you’ve read here raises any concerns whatsoever, be sure to talk to an experienced bankruptcy attorney. Preferably do so before giving away anything of any meaningful value, or selling it for a price less than within a reasonable range of its actual value. Remember that this applies not just to situations in which you are considering selling or giving away assets purposely to prevent them from going to your creditors. It can also apply if you have no such intent.

And if you’ve already given the gift or made the transfer, all the more reason to bring this up with an attorney. There may well be ways to get around the problem even after the gift/transfer has been made.

 

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