Fraudulent Transfers

Throughout the bankruptcy process, the financial activity of the debtor will be subject to examination by the trustee and by creditors. In most cases, the examination consists of the trustee reading though the documents filed by the debtor and asking questions at a relatively short and informal meeting. However, certain activity during the ‘look back period’ will draw the attention of the trustee and potentially the creditors. One such activity is a fraudulent transfer, which is where someone transfers property in a manner that hinders, delays, or denies a creditor.

The problem with fraudulent transfers is that some people do not know that they are making them. For example, selling a relative some property at below the market value of the property is common and considered a favor or a gift. But, in the eyes of the trustee or a creditor, the full value of that property should have belonged to the bankruptcy estate, which the creditors ultimately divide and share.

Having to deal with potential fraudulent transfers will add some complications to the bankruptcy process, likely leading to valuations and potentially liability for the individual who the debtor transferred the property to. While the first thought of a debtor may be to avoid disclosing the pre-petition transfer of property, the penalties for fraud during the bankruptcy process can range from non-dischargeability to jail time - so full and complete disclosure is not only the best option, it is the only option.

In Conclusion

Any potentially fraudulent transfer must be disclosed to the debtor’s attorney and to the trustee. While there may be an impact on the debtor or the recipient of the transfer as a result of this disclosure, a capable attorney can maximize the debtor’s exemptions in order to minimize any liability.