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What Is Fraudulent Conveyance and How Can I Avoid it?

Key Takeaways:

  • Fraudulent conveyance happens when a person intentionally transfers property to another to defraud, hinder, or delay a creditor's ability to collect on a debt.​
  • A bankruptcy trustee can void fraudulent transfers going back two years before filing.
  • Avoid a fraudulent transfer by being honest with creditors about your ability to pay debts.

A fraudulent transfer is an attempt to transfer property to another person to defraud creditors in bankruptcy. Suppose a company knows it will declare bankruptcy but doesn’t want the creditors to take back all the secured property. In that case, the debtor may try to sell or transfer the property to someone else before bankruptcy so the creditors can’t get to it.

Even though the transfer already happened, the bankruptcy court can look back over the past couple of years and pull back any fraudulent transfers. Then the filer can’t discharge that debt. If you have questions about fraudulent transfers under the bankruptcy code, talk to a bankruptcy lawyer about your legal options.

What Is an Example of a Fraudulent Conveyance?

The classic fraudulent conveyance happens when a person intentionally transfers property to another to defraud, hinder, or delay a creditor’s ability to collect on a debt.

For example, a car dealership finances a car for a buyer based on the buyer’s credit report and bank account funds. Later, the buyer transfers their bank account to a friend but maintains control over the funds and stops making payments on the car. In this scenario, the dealership cannot go after the buyer’s bank account for payment because it’s no longer in the buyer’s name.

If the dealership can show the only purpose for transferring the account was to defraud, hinder, or delay the dealership’s ability to collect on the debt. In that case, the dealership can recover from the debtor’s assets.

Sometimes, it’s difficult for the creditor to prove there was actual intent to defraud at the time of the transfer. A federal bankruptcy court can look for certain tell-tale badges of fraud that are common in these types of fraudulent transfers. These signs include a transfer that was purposefully kept secret and hidden from the public, failing to record a deed in a real estate transaction, or when a person gives away all their assets. A court may infer a fraudulent intent, helping the creditor set aside the transfer.

Unintended Fraudulent Conveyance

There is a second type of fraudulent transfer that does not need actual fraud. When a person is insolvent, or can’t pay debts due to a transfer, it can be constructive fraud.

For example, a grandparent transfers a house to a family member to avoid the complicated will or trust estate planning procedures. If the grandparent files for bankruptcy, a bankruptcy court may be able to undo the transfer and force the sale of the house to pay any debts.

US Fraudulent Conveyance Laws

In the United States, state fraudulent transfer laws generally follow three versions of model fraudulent conveyance laws or bankruptcy laws:

  • Uniform Fraudulent Transfer Act (UFTA)
  • Uniform Fraudulent Conveyance Act (UFCA)
  • Uniform Voidable Transactions Act (UVTA)

State fraudulent transfer laws provide guidelines and remedies for the creditor. In some cases, and without the help of bankruptcy, a creditor can recover the property transferred from the property receiver. Or, a court can order a sale of the property, and the fair market value proceeds will pay off the creditor’s claim.

The creditor may have to use the power of the bankruptcy courts to void the fraudulent transfer of property.

How To Avoid a Fraudulent Transfer

The best way to avoid a fraudulent transfer is to be honest with creditors about personal assets and your ability to pay debts. Creditors can track personal assets to find any attempts at hidden transferred assets.

Also, some people may face fraudulent transfer accusations, even if they didn’t intend to defraud a creditor. Regardless of good faith, if you are insolvent or unable to pay off debts, creditors may be able to void a transfer.

Talk To a Lawyer About Protecting a Transfer of Assets Before Bankruptcy

If you are considering filing a bankruptcy petition but have transferred assets or property in the past two years or so, you may need to think about an asset protection plan. The lookback period for pulling back fraudulent transfers depends on state law. For more information about avoiding a fraudulent conveyance in a bankruptcy filing, talk to a local bankruptcy lawyer for advice.

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