Transfer of Assets Prior to Bankruptcy- Part 2

Long & Long Team

What happens when a debtor does a transfer of assets prior to bankruptcy? This article explores fraudulent transfers that take place within two years before filing. In a prior article we explored preferential transfers prior to filing bankruptcy. In subsequent articles we will explore other fraudulent transfers prior to filing.

Transfers or Obligations Incurred Within Two Years of Filing Chapter 7 or Chapter 13 Bankruptcy

Under Section 548 of the Bankruptcy Code, the bankruptcy trustee may avoid any transfer of an interest of the debtor in property made within two years before the filing of the bankruptcy. The bankruptcy trustee may also avoid any obligation incurred by the debtor that was incurred within two years before the filing of the bankruptcy.

A transfer generally means the debtor parting with, or disposing of, his or her property or an interest in property. An example would be the debtor giving $50,000 to the debtor’s parents. In order to avoid the transfer or obligation the trustee must prove it was fraudulent. There are two ways the bankruptcy trustee can prove fraud under Section 548.

Actual Intent to Hinder, Delay, or Defraud Creditors

The first way the transfer or obligation can be avoided is by proving actual intent. Specifically, the transfer was made or the obligation incurred with the actual intent by the debtor to hinder, delay, or defraud any entity that the debtor was, or became, indebted. Using the example above, the trustee would need to show that the transfer of the debtor’s money to the parents was done with actual intent to keep it away from present or future creditors.

Proving actual intent to defraud is very fact-oriented and beyond the scope of this discussion. However, the trustee does not need to show actual intent if the following is proved.

Received Less Than a Reasonably Equivalent Value

If the debtor received less than reasonably equivalent value for the transfer or obligation it may be avoided under any of the following four conditions:

  • The debtor was insolvent at the time or became insolvent as a result of the transfer or obligation,
  • The debtor was engaged, or about to engage, in a business or transaction for which any property remaining with the debtor was unreasonably small capital,
  • The debtor intended to incur, or believed the debtor would incur, debts that would be beyond the ability of the debtor to pay as those debts matured, or
  • The debtor made the transfer or incurred the obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. 11 U.S.C. §548(a)(1)(B).

What constitutes a fraudulent transfer or obligation prior to filing bankruptcy is a complex issue. All transfers must be disclosed to, and carefully considered by an experienced bankruptcy attorney. Call or contact LONG & LONG now at 303-832-2655.

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