Was Your Gift a Fraudulent Transfer?

At the heart of Chapter 7 bankruptcy is a tradeoff: the debtor gets certain debts eliminated but, in exchange, must turn over any property that they can’t exempt. Some debtors, however, don’t like this tradeoff. Instead, they want to wipe out debts while preserving all their assets. This desire leads some of them to hide assets by giving them away or selling them.

The bankruptcy code anticipates this happening and includes the concept of “fraudulent transfers.” The bankruptcy trustee can claw back any transfer that is fraudulent, so our clients need some general understanding of what gifts might be covered. Contact our Plantation bankruptcy lawyer to learn more.

Types of Fraudulent Transfers

The bankruptcy code recognizes two types of fraudulent transfers:

• Actual fraud
• Constructive fraud

With actual fraud, the debtor has the intent of hurting creditors with the transfer. Essentially, that means the debtor is thinking, “I’m going to give this asset away so my creditor cannot get it or can’t get it easily.” That’s intent. Under the language of the bankruptcy code, Section 548(a)(1)(A), actual fraud exists when the debtor transfers an asset with intent to hinder, delay, or defraud creditors.

With “constructive fraud,” however, the debtor does not need any actual intent to defraud creditors. Instead, constructive fraud exists when the creditor sells or transfers an asset for less than its value at a time the debtor was insolvent. This definition can be found in Section 548(a)(1)(B). So if Melissa sells her car, which has a Blue Book value of $10,000, for only $6,000 at a time when she is insolvent, then she has committed constructive fraud.

Was Your Gift Fraudulent?

The trustee will want to know about any asset you have sold or given away in the two-year period before you filed for bankruptcy and will scrutinize these transfers. The trustee might even ask you questions about the transfer at the 341 Meeting of Creditors.

Of course, not every gift will be fraudulent.  The bankruptcy code even exempts certain charitable donations to religious or charitable organizations, provided they are not too large (15% of income). So those transfers are okay.

Small gifts are okay, also. In fact, the Statement of Financial Affairs you file only requires that you report over $600 given to a person in a two-year period. If you gave less than that, you don’t even need to inform the trustee.

Will the Trustee Undo the Gift?

Though the trustee has the power to undo a gift, there are practical considerations. For example, it might be difficult to locate the property or expensive to actually take possession and sell it for the benefit of creditors. Trustees are limited in the time and money they are willing to expend, especially if the gift was small.

Avoid Fraudulent Transfers

Regardless of what the trustee chooses to do, debtors should avoid fraudulent transfers. Failing to disclose transfers might constitute bankruptcy fraud. The purpose of filing bankruptcy is to get a discharge of debts, not embroil yourself in a legal investigation as to whether you have broken the law.

For help deciding what to do, contact Nowack & Olson today at 888-813-4737 for a free consultation.

Resource:

uscourts.gov/sites/default/files/form_b_107.pdf