11 USC §548 and §544 of the Bankruptcy Code governs fraudulent transfers of property or interests in property. This article will break down the major factors and will help the reader/debtor identify these issues prior to filing for bankruptcy. Since there are serious implications and consequences that rise from any fraudulent transfers, filing for Bankruptcy might harm some debtors. There are two types of fraud (actual fraud and constructive fraud).
Actual Fraud requires the Bankruptcy trustee to prove that the Debtor had the actual intent to hinder, delay or defraud present or future creditors. This article will only touch on Constructive Fraud which can be shown by proving that the transfer was made for less than “reasonably equivalent value,” and the debtor was insolvent or became insolvent because of the transfer.
Prior to filing for Bankruptcy ask yourself these questions in the order that they are listed below. If your answer is Yes then continue to the next question.
1) Did you transfer or convey any property in the last 4 years prior to filing for a Bankruptcy?
a. (Examples of Property--House, Car, Money, Stocks, Business, License or Franchise, Copyrights…basically ANYTHING)
b. Transfer or convey means either sell or give away as a gift or even create a lien.
2) Did the Property have value?
a. The value of the property is a question of fact, meaning it is determined by the Judge or the Jury. A good rule of thumb is what the debtor could have received for the property in a competitive auction.
3) Did you receive fair and reasonable consideration for the transfer.
a. In the case of a gift the answer will always be NO, since it was given away for free.
If the Answer is NO to questions 1 and 2 and Yes to question 3, then chances are you will not have an issue with fraudulent transfers. However, still consult an attorney.
If your Answer is Yes to Questions 1 and 2 and No to Question 3 then you might be in the category of fraudulent transfers.
Avoidance Powers of The Trustee in Fraudulent Transfers
The Bankruptcy Code is designed to invalidate transactions that unfairly diminish the Debtor’s assets available to pay creditors.
Therefore, the Bankruptcy trustee has the power to invalidate that transfer and revert the property back to the bankruptcy estate. Then sell the property for the benefit of Creditors.