Transferring Assets Prior to Bankruptcy-Part III

Long & Long Team

What happens when someone transfers assets prior to filing bankruptcy? This article explores fraudulent transfers that take place within four years before filing bankruptcy. In prior articles we explored transfers within two years prior to filing bankruptcy. In a subsequent blog we will explore transfers to a self-settled trust within ten years of filing bankruptcy.

Transfers Or Obligations Incurred Within Four Years of Filing a Chapter 7 or Chapter 13 Bankruptcy

Under the Bankruptcy Code the trustee can reach back two years to avoid fraudulent transfers. However, Colorado’s Uniform Fraudulent Transfer Act, Title 38, Article 8, allows the trustee to potentially avoid a fraudulent transfer or obligation incurred within four years of filing bankruptcy.

Much of the law on fraud in the Bankruptcy Code is similar to the Uniform Fraudulent Transfer Act. A transfer generally means the debtor parting with, or disposing of, his or her property or an interest in property. An obligation incurred simply means that the debtor incurred an obligation.

Reasonably Equivalent Value and Good Faith

The first inquiry the trustee will look at under Colorado state law is adequate consideration. Did the debtor receive reasonably equivalent value in exchange for the transfer or obligation?For example, the debtor transferred $10,000 to a creditor in exchange for the creditor reducing the $20,000 amount owed by $10,000.Another example would be a debtor incurring a $30,000 obligation on a car loan in exchange for the debtor receiving a $30,000 vehicle. These examples constitute reasonably equivalent value.

The second inquiry is good faith. Good faith generally means the recipient was unaware of the debtor’s insolvency or fraudulent intent at the time of the transfer.In the case of both reasonably equivalent value and good faith, the transfer or obligation cannot be avoided by the trustee and the matter ends.

Less Than Reasonably Equivalent Value

However, if the debtor received less than reasonably equivalent value for the transfer or obligation it may be avoided by the trustee, without regard to actual intent, under any of the following three conditions:

  • The debtor was left by the transfer or obligation with unreasonably small assets for a transaction or the business in which he was engaged,
  • Thedebtor was insolvent at the time or as a result of the transfer or obligation, or
  • The debtor intended to incur, or believed that he would incur, more debts than he would be able to pay.C.R.S. 38-8. Uniform Fraudulent Transfer Act Prefatory Note.

In this instance, the good faith defense applies to the extent of the value given.

Actual Intent to Hinder, Delay, or Defraud Creditors

What happens if the transfer was made or the obligation incurred with the actual intent by the debtor to hinder, delay, or defraud any entity? It would be voidable by the trustee, subject to the good faith defense described above.

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. With over 35 yearsof experience call or contact LONG & LONG P.C. now at 303-832-2655.

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