Understanding the New Bankruptcy Rules

Changes to our national bankruptcy laws in 2005 have made it easier than ever to cast doubt on transfers of valuable property that have occurred within a year of a filing for bankruptcy. The Trustee, or a creditor, can allege within one year of filing that you attempted to avoid bankruptcy through fraudulent means, which may make your situation even worse. Always keep in mind: the Trustee is there for the bankruptcy court and for the creditors. This is why anyone making large transfers before filing needs expert advice and representation.

Fraudulent transfers, or “fraudulent conveyances”, can be charged even if there never was any real intent to cheat anyone on the part of the debtor. Many people who face credit crises simply give away some of their assets, often to family members and others who have tried to help them. However nearly every transfer made “under the table” is subject to examination, so it is much better to transfer openly.

Before filing for Chapter 7 or Chapter 13 bankruptcy, debtors are required to list all valuable transfers for the previous year. Failure to list a transfer is a violation of the law, and also can cause suspicion about the legality of the transfer. If a fraudulent transfer is discovered after discharge, the bankruptcy even can be vacated (invalidated).

There are two types of fraudulent transfers: constructive fraud, and actual fraud. Constructive fraud is fraud that was meant to relieve oneself of more hardship but not to cheat creditors outright. It can be evidenced if the debtor already was out of money when the property was disposed or if the transfer appears to be a gift, and if the transfer is unfair to a creditor to whom money is owed. Actual fraud is just that – fraud. Both types of transfers result either in a return of property, or a payment of the value of the property. Actual fraud also can result in jail time.

The bankruptcy court can be very unforgiving with fraudulent transfers. Often a home is a debtor’s largest asset, and if a trustee finds fraud, he or she may go after home equity. In other words, bankruptcy may tragically end up consuming the asset for which you sought protection through filing in the first place.

Luckily, there is a strong defense against constructive fraud. It must be proven that there has been a “reasonably equivalent” transfer in value, and sometimes this just is not the case. This is where bankruptcy lawyers often earn their weight in gold.

Finally, keep in mind that most states also have the power to examine your prior year transfers to search for fraud. Be sure that you are ready to pass the test. If you are transferring property and are considering bankruptcy, or if you have transferred property that is now uncovered and in question, a good lawyer will work to protect your transfer, and perhaps even the recipient of your “innocent” favor.