Last updated Jan. 30, 2018.
A fraudulent transfer can basically be defined as transferring property out of your name to delay or defraud a creditor. If you “sell” a home worth $1 million to your Uncle Joe for just $1 dollar because a creditor is breathing down your neck, you’ve likely triggered state and federal fraudulent conveyance statutes.
What is constructive fraud?
There are two types of fraudulent transfers. Actual fraud involves transferring property with the actual intent to defraud creditors. Constructive fraud involves a transfer that is made for grossly inadequate consideration, such as the “sale” to Uncle Joe in the example above, which supplies a presumption of fraud even absent direct proof.
The structure of constructive fraud in bankruptcy includes two parts:
- a lack of “reasonably equivalent value” and
- a sign of financial distress
Signs of financial distress are being insolvent or rendered insolvent, unreasonably small capital, and incurring debts beyond the ability to pay as they mature.
In Bankruptcy, the Trustee Can Sue to Unwind the Transfer
Once a property transfer is deemed fraudulent, either because there is proof of fraud or the sale price is too low, the trustee may attempt to recover the property, or the value of the property, and make it part of the bankruptcy estate. This is done through filing a lawsuit.
In our example with Uncle Joe, if you transferred your house to Joe for $1 and then filed bankruptcy, the trustee would serve Joe with a complaint seeking to recover the value of the home. If the conveyance is then found to be fraudulent, you’ll lose your right to claim an exemption for the property.
The trustee may recover the property from either the immediate recipient (Joe) or from anyone else to whom the property was subsequently transferred (perhaps a cousin). An exception is the bona fide purchaser rule. A bona fide purchaser is one who acted in good faith to purchase the property without notice of the outstanding rights of others to the property. The bona fide purchaser has the right to retain the property.
See also: Can I Pay Back Family Before Bankruptcy?
The Look Back Period for a Fraudulent Transfer
How long can a trustee look back in time to find a fraudulent conveyance?
Under the Bankruptcy Code, the look back period is two years; however, the trustee may use state law if the allowed look back period is longer. Many states, including Florida and Massachusetts, have adopted the Uniform Fraudulent Transfer Act (UFTA), which allows creditors to look back four years to find a fraudulent conveyance. Some states implement an older version of UFTA called the Uniform Fraudulent Conveyances Act (UFCA).
In any case, if your state is a UFTA state, the trustee will then have a four-year period to try to unwind transfers that appear fraudulent. Note that some states will have longer look back periods. In New York, Minnesota, Michigan, and Maine, the look back period is six years. In Kentucky and Iowa, it’s five years.
The Bottom Line: Seek the Help of a Bankruptcy Attorney
Conveyance laws inside and outside of bankruptcy can be complicated. Seek the help of an experienced bankruptcy attorney before transferring property. If you’ve already transferred property that may be construed as constructive fraud, a bankruptcy lawyer can help you avoid negative consequences — namely, your bankruptcy being denied a discharge — by recovering the asset before you file for bankruptcy.
And remember, fraud — whether it is intentional or not — is not the only way to screw up your bankruptcy discharge. Destroying records, lying under oath, hiding property, and/or not being able to explain why certain property is missing from your bankruptcy estate are other big reasons a bankruptcy can fail. Be smart and be honest with the bankruptcy court. The last thing you want to do is waste your precious time and money filing a bankruptcy case that will be denied — and you certainly don’t want to go to jail for bankruptcy fraud.
If you are considering bankruptcy but don’t know what to do next, consult with National Bankruptcy Forum today. Our debt evaluations are free, and we’re available 24/7.
You may also be interested in:
- When Creditors Come Calling After Your Bankruptcy Discharge
- The Bankruptcy Discharge is the Key to Rebuilding Your Credit
- Failure to Keep Adequate Records Can Be Grounds for Denying Bankruptcy Discharge
- How Often Can You File for Bankruptcy and Receive a Discharge?
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.