Can a Division at Divorce Be a Fraudulent Conveyance?

by Wayne Thomas

Property division is a fundamental part of a divorce proceeding. Couples are generally free to agree on a property settlement or have the court decide according to state law. As part of the process, assets may be sold or title transferred between spouses. However, if the intent of the transfer is to avoid creditors' claims, the courts have the authority to void the transaction and protect the legal right of the creditor to collect on the debt.

Fraudulent Conveyance

A fraudulent conveyance is the intentional transfer of property to another person for the purpose of making the asset inaccessible to creditors. In the divorce context, this involves the retitling of property to reduce the size of a spouse's available property, at the expense of the other spouse or an outside creditor. A court reviewing the claim of a fraudulent conveyance must look to the specific facts of the situation, taking into account whether one party received far less than fair market value for the exchange.

Property Division

As part of the property division aspect of every divorce, assets owned between a married couple must be divided. Some states distribute the assets equally among the parties while others take into account fairness and marital fault, as well as non-monetary contributions to the marriage, which can lead to an unequal distribution. Because some assets are not easily capable of division, such as the marital home, it is not uncommon for the parties to agree that one spouse gets the entire asset in exchange for an alimony award or other assets. This procedure of retitling property as part of divorce is generally not considered a fraudulent conveyance.

Sham Divorce

One spouse being awarded a larger share of the marital estate is not automatically a fraudulent conveyance, unless the intent is to avoid creditors. An example might be a spouse personally guaranteeing loans to a business that goes into bankruptcy. The couple then files for divorce and the husband signs over all of the marital property to the other spouse, making himself insolvent and sheltering the assets from his creditors. In this case, the creditors would need to convince the court that the divorce was merely a "sham" to frustrate collection efforts. A fact that might lead a judge to this conclusion is if the couple resumed living together after the divorce.

Spouse as Creditor

Another scenario that may be considered a fraudulent conveyance is if one spouse transfers assets to another person to deny the other spouse her fair share in the divorce. For example, assume that a husband decides to open a business on land owned by his parents. To pay for the business, the husband borrows money through a loan from his parents and makes payments during the marriage. The wife then files for divorce; the husband stops making payments and instead transfers the business to his parents to satisfy the debt, effectively shielding it from property division. If the court finds the value of the business grossly exceeded the outstanding debt, this could be considered a fraudulent conveyance.