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What is Fraudulent Conveyance in a Bankruptcy?

It is important to understand what the bankruptcy courts consider fraud in relation to bankruptcy.  When debt is overwhelming, debtors may become desperate.  You need to know where to draw the line between innovative solutions and what the court considers fraudulent behavior.

Fraudulent conveyance is a commonly used term in bankruptcy cases.  A conveyance is a transfer of property or assets.  Before or during bankruptcy, in an effort to protect assets from liquidation or otherwise keep them out of a creditor's reach, a debtor may decide to transfer an asset to a relative, trust, or corporation thinking that if the personal estate does not contain the asset, it is safe.  However, a bankruptcy trustee overseeing a bankruptcy estate has the job of making sure that conveyances do not unfairly deny creditors their rightful payments.  The law gives the trustee authority to recover certain transfers to repay creditors.

Bankruptcy law establishes two types of fraudulent transfers.

11 USC § 548 (http://www.law.cornell.edu/uscode/text/11/548) establishes two types of situations that constitute fraudulent conveyance:

  • Actual fraud. Transfers made within two years prior to filing bankruptcy and with the intent of hindering creditor payment are fraud.
  • Constructive fraud. Transfers are constructive fraud when they involve exchanges that are less than a reasonably equivalent value during the time when the debtor is not able to pay debts.  Constructive fraud also exists when as a result of the transfer the debtor is not able to pay debts.

In either type of alleged fraudulent transfer, the bankruptcy trustee must convince the court that the transfer meets definition of fraud as outlined by the bankruptcy code.  If you plan on filing bankruptcy and have transferred assets, be sure to discuss the details of the transfer with your bankruptcy attorney.  Your lawyer can advise that you take proper actions and help protect you against allegations of fraudulent conveyance.

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