Recent Bankruptcy Case Questions Constructive Fraudulent Transfers

A recent consumer bankruptcy case questions whether constructive fraudulent transfers can include payments made for college tuition and other related expenses. In other words, the bankruptcy trustee sought to expand the definition of a constructive fraudulent transfer in a Chapter 7 bankruptcy case involving a husband and wife. While the case occurred outside Illinois, it could be persuasive for Illinois bankruptcy courts, and it could end up resulting in a broader assessment of what constitutes a constructive fraudulent transfer in consumer bankruptcy cases more generally.
We will say more about constructive fraudulent transfers, the facts of the case, and the implications of the bankruptcy court’s decision.
What is a Constructive Fraudulent Transfer?
Under the U.S. Bankruptcy Code, a fraudulent transfer of property refers to the gift or sale of property within two years prior to a bankruptcy either intentionally to avoid paying creditors or having the asset liquidated, or unintentionally with the same result. The latter is known as a constructive fraudulent transfer or conveyance, and it is defined as a transfer for which
  • Debtor “received less than a reasonably equivalent value in exchange”; and
  • Debtor made the transfer at a time when she or he already was insolvent.
What does it mean when a debtor receives less than a reasonably equivalent value in exchange for the transfer of the property? In some cases, this might be obvious. For example, a debtor might own an expensive artwork that she or he knows is valued at approximately $10,000 and “sells” it to a close friend for $100. This kind of scenario might arguably be in which the debtor objectively “received less than a reasonably equivalent value in exchange.” But what happens when the property or asset at issue, and what the debtor gets in exchange, is more subjective? That is largely the question at issue in Geltzer v. Oberlin College.
Getting the Facts About Geltzer v. Oberlin College
In Geltzer, two married debtors filed for Chapter 7 bankruptcy. One of the transfers of property that the debtors made in the two years prior to filing for bankruptcy was the transfer of money to pay for their daughters’ college tuition, books and supplies, and room and board fees at Oberlin College. The bankruptcy trustee argued that the debtors did not receive anything of a reasonably equivalent value for the money they paid, and as such argued that these payments to Oberlin College constituted constructive fraudulent transfers.
The key question at issue for the bankruptcy court was whether the debtors “received reasonably equivalent value” in the form of their daughters’ college education for the transfers they made for college tuition and the other related expenses listed above. The court also had to determine whether it made a difference if the transfers were made before or after the daughters reached the age of majority. In the case of the debtors, some of the transfers were made before the daughters turned 21 and some were made afterward.
The court discussed a “developing body of law regarding whether college tuition payments made by parents for the education of their children after they reach the age of majority are constructively fraudulent.” The court also emphasized that “whether insolvent parents receive reasonably equivalent value for college tuition payments made for the benefit of their adult children is a culturally and social charged issue.” The court ultimately reasoned that the benefits received by the debtors did not “constitute value” under the Bankruptcy Code, and as such, any payments made after the daughters reached the age of majority constituted constructive fraudulent transfers.
Learn More from an Oak Park Bankruptcy Lawyer
Courts tend to be split on this issue, and it is possible that the U.S. Supreme Court could end up reviewing the definition of “value” under the Bankruptcy Code with regard to constructive fraudulent transfers. In the meantime, if you have questions about bankruptcy, an experienced Oak Park consumer bankruptcy attorney can help. Contact the Emerson Law Firm today.
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