Filing for bankruptcy allows you to eliminate some of your debt by either liquidating your assets to repay a portion of your debt or by creating a three to five year repayment plan. A fraudulent conveyance occurs when property is transferred to another individual prior to filing for bankruptcy. The bankruptcy court considers a fraudulent conveyance to be very serious because it can affect the assets available to repay creditors. A fraudulent conveyance can have severe consequences to a bankruptcy case including the dismissal of the case.
When a fraudulent transfer is made with "actual fraud," there is an intention at the time of the transfer to defraud creditors. In other words, the property is transferred with the purpose of hiding the asset from one or more creditors. To determine actual fraud, the court looks at several things including whether the property transferred is a large portion of your assets and whether you retain control of the asset even though the asset is in another individual's name. In addition, the court examines the entire situation before making a decision regarding whether actual fraud exists.
In contrast to actual fraud, constructive fraud occurs when an asset is exchanged for unequal value. For example, if you sell your home to a friend for $500, this is an exchange for unequal value because your home most likely is worth more than that amount. To determine whether constructive fraud is present, the court examines whether the exchange for value is equivalent and whether you are able to pay your debts at the time the transfer is made. The latter factor may give an indication of whether you are considering filing for bankruptcy when the transfer occurs.
A fraudulent conveyance must occur no more than one year prior to when you file for bankruptcy. Anything older than one year will not be considered by the court. The court presumes that you will consider making a fraudulent transfer within a reasonable time before filing for bankruptcy. Depending on the type of property being transferred, more than one step may need to occur before the transfer is complete. For example, for a real property transfer to be complete, the new deed must be recorded with the county recorder’s office. Therefore, even if you sold the property 16 months ago, if the deed is recorded only nine months ago, the court examines the transfer to determine if fraud is present.
If a fraudulent conveyance occurs in a bankruptcy case, the trustee has the authority to "avoid," or cancel, the transfer, and the property at issue is returned to the bankruptcy estate. If the property was transferred to a third party, the trustee can seize it from that individual as well as the initial transferee. However, if the third party is a bona-fide purchaser, meaning the individual exchanged for value, operated in good faith and did not know of any outstanding right to the property, then the purchaser can retain possession of the property. If valuable improvements have been made to the property, such as adding a roof to a home, the individual in possession also may retain the property.