Learning About Fraudulent Conveyances in Personal Bankruptcy

When a debtor in Oak Park files for personal bankruptcy, she or he will need to provide clear documentation of financials, including assets, income, and other information. In addition, the debtor will be required to provide information about any recent property transfers made, including gifts and sales of property. The debtor must disclose any transfers that have been made in the last two years prior to filing for bankruptcy. All of this information is contained in a specific bankruptcy form known as Your Statement of Financial Affairs for Individuals Filing for Bankruptcy.

If a bankruptcy trustee suspects that a fraudulent transfer has been made, the trustee can attempt to recover that fraudulent transfer. The topic of fraudulent transfers—also known as fraudulent conveyances—can be confusing. We want to provide you with more information about the types of fraudulent transfers and the ways in which they can occur.

Two Different Types of Fraudulent Transfers

Under the U.S. Bankruptcy Code, a trustee may “avoid” a transfer made by either:

Actual fraud; or Constructive fraud.

Actual Fraud Versus Constructive Fraud Under the U.S. Bankruptcy Code
The U.S. Bankruptcy Code defines actual fraud as a transfer made “with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.” In other words, actual fraud occurs when a debtor transfers property with the intent to defraud or to prevent a creditor from obtaining the money that is owed. For example, actual fraud might involve a debtor owning a boat worth $20,000 and giving the boat as a gift to a sibling or friend in order to avoid having the boat sold in the Chapter 7 bankruptcy proceeding. In that situation, the debtor would be gifting the boat with the understanding and intent that the boat not become part of the liquidation of the estate.

Constructive fraud is a little bit different and can be more complex. In general, there is no need for the debtor to have any intent to defraud. Instead, for constructive fraud to exist, the debtor must have made a transfer of property for which she or he “received less than a reasonably equivalent value in exchange,” and the debtor must have been financially unable to pay his or her debts when she or he made the transfer or because of the transfer.

Given the language of “reasonably equivalent value,” determining whether there is constructive fraud can be more subjective than determining actual fraud. To be sure, something that is of “reasonably equivalent value” to one person might not be of “reasonably equivalent value” to another, especially when the transfer is made for services. Typically, cases in which a bankruptcy trustee suspects constructive fraud are those in which the debtor is insolvent but makes a transfer of property.

Learn More from an Oak Park Bankruptcy Lawyer

Do you have questions about fraudulent transfers under the U.S. Bankruptcy Code, or more general questions about properly disclosing financial information? An experienced consumer bankruptcy lawyer in Oak Park can help. Contact the Emerson Law Firm for more information.

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