What Constitutes a “Fraudulent” Transfer in Bankruptcy
One of the most important things a debtor attorney must do prior to his client filing for bankruptcy is to investigate whether the debtor transferred any property out of his name within six (6) years prior to the projected filing date of the bankruptcy. Such a transfer is deemed to be “fraudulent” and as such can be voided by the Trustee. The transferred property would be liquidated by the Trustee for the benefit of the creditors.
“Fraudulent” transfer does not necessarily mean that the property was transferred with nefarious intent (such as to shield it from creditors in a potential bankruptcy). The transfer could have been made with the most honest of intentions, but inadvertently became “fraudulent” because of the following three elements :
- The transfer was made at a time when the debtor was insolvent, or the debtor became insolvent as a result of the transfer;
- The debtor did not receive “fair market value” in exchange for the transfer; and
- The transfer occurred within six years prior to the debtor filing for bankruptcy.
A debtor is deemed to be insolvent if the amount of his debts exceed the amount of his assets at the time of the transfer.
The actual Bankruptcy Statute [11 U.S.C. 548(a)(1)(B) ] allows the Trustee to void the transfer if it occurred within two years prior to the debtor filing for bankruptcy relief. However, a different Bankruptcy Statute [11 U.S.C. 544(b)(1)] authorizes the Trustee to avoid a transfer that is voidable under applicable Michigan State law. This actually allows the Trustee to void a transfer that occurred within six years prior to the debtor filing for bankruptcy.
Based on the foregoing, in order to avoid running into the issue of a fraudulent transfer, the debtor has to show that if he transferred property within six years prior to the projected filing date of the bankruptcy, he was not insolvent at the time of transfer, and he did not become insolvent as a result of the transfer. He can do this by showing that the value of his assets exceeded the amount of his debt both at the time of and after the transfer.
Even if the debtor became insolvent as a result of the transfer, there would still not be a fraudulent conveyance if the debtor received fair market value for the transferred asset in exchange for the transfer.
If the debtor was insolvent at the time of the transfer, or became insolvent as a result of the transfer, or he did not receive fair market value from the transferee in exchange, and the transfer occurred within six years prior to the projected filing date of the bankruptcy, then the Trustee will void the transfer and liquidate the property. It the debtor does NOT want the Trustee to do so, his only option would be to wait and file bankruptcy only after six years plus one day after the transfer date have passed.
Please contact the Law Office Of Joseph L. Grima & Associates P.C. at (313)417-8422 so that we can explain this potential issue if you are thinking of filing for bankruptcy protection.