Property Transfers Prior to Filing a Bankruptcy

Fraudulent TransferIt is important to be aware, when considering filing a bankruptcy petition, that there are various pitfalls and potentially derailing issues that each filer may face. As a New Mexico bankruptcy lawyer, I know that transfers of property made before filing can cause issues. One issue that delays a bankruptcy petition is the existence or perceived existence of fraudulent activity on the part of the petitioner in defrauding the creditor(s).

There are two types of fraudulent transfers that come out of 11 USC § 548. The first type is actual fraud where the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor owes or would owe money. The second type is constructive fraud where the debtor received less than a “reasonably equivalent value” in exchange for such a transfer or obligation. Constructive fraud requires that the debtor have been insolvent (couldn’t pay back the debt) at the time or became insolvent as a result of the particular transfer or that they undertook a debt for an insider; there other scenarios that could create constructive fraud, see 11 USC § 548 regarding these rarely occurring scenarios. It should be noted that constructive fraudulent transfers can happen by accident (for example if you sell your sister a car for $3,000 that is worth $5,000; or you retitle a car in your child’s name). A good rule of thumb to avoid fraudulent transfers is to make sure that all transfers are made for or at full market value.

11 USC § 548 generally applies to transfers that were made within two years of the filing of the bankruptcy petition (this is known as the look back period). There are instancess that can make the look back period as long as 10 years, such as where the debtor has created a self-settled trust or is the beneficiary of such a trust. One aspect that will determine the length of the look back period depends on whether the Uniform Fraudulent Transfers Act (UFTA) applies to the transfer. New Mexico has adopted the UFTA in NMSA 1978, §56-10-14 et sec. This can extend  the look back period up to 4 years if it applies to a transfer.

Now that we’ve looked at how the bankruptcy code defines a fraudulent transfer, the question becomes what is the penalty if there is a fraudulent transfer found by the trustee or bankruptcy court?

The penalty for a fraudulent transfer can vary, depending upon degree of intent and other factors, but at a minimum, the finding of such a transfer allows the bankruptcy trustee to recover the property transferred (which includes suing the party that received the transfer) and void the transfer itself, if necessary. The trustee can make the recovered property part of the bankruptcy estate; if the property cannot otherwise be exempted, it will be liquidated to pay creditors. Depending on the severity of the fraud, a debtor’s discharge can be denied as a result of the fraudulent transfer (this usually applies when there is actual fraud). Having a good bankruptcy attorney will help you avoid these types of problems.

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