What Is Fraudulent Conveyance? - Frank J. LaPerch, PC

What is Fraudulent Conveyance?

Serious money struggles can introduce you to a whole world of new terms and concepts. It is one of the reasons why bankruptcy is such an intimidating experience – you understand the basics, but when you are immersed in the process suddenly it is as if everyone around you knows what they are talking about and you are lost. This is why it is so important to work with an experienced bankruptcy attorney. He or she will explain the various issues related to bankruptcy and help you avoid mistakes that can cost you big in the long run.

Fraudulent Conveyance

One of the terms you might hear during bankruptcy is fraudulent conveyance. This term is related to the bankruptcy trustee and his or her role in the bankruptcy process.

When you file for bankruptcy the court will appoint a trustee to manage the assets in your estate and ensure that creditors are paid out of the proceeds of the estate. Your trustee has the power to prevent or reverse certain transfers from your estate that would put an asset out of a creditor’s reach. In many cases, transfers such as this are considered fraud.

Types of Fraud

In order for a trustee or creditor to prove fraud has occurred, they must show a transfer was made within a year of your bankruptcy filing and that it was made with the intention of hindering or defrauding them. Actual fraud requires intent to defraud, which is tough but possible to prove.

Another type of fraud, known as constructive fraud, is a little bit different. This occurs when you transfer property out of your estate to avoid paying a creditor and receive less than a reasonable value for that property at a time when you were unable to pay your debts or you are unable to do so as a result of having made the transfer.

In constructive fraud there is no need to prove intent. The challenge in proving constructive fraud is that it can be difficult to determine what a fair value is for something in a person’s estate. A person could be trying to sell something at a bargain price in order to earn money, so the bankruptcy court must look carefully at all the circumstances surrounding the transaction. They consider fair market value, whether the transaction took place in good faith, whether there were competitive bids, and the net effect the transfer had on the estate.

In New York, many trustees will ask about transfers made in the last six years. This is because the law against fraudulent conveyances looks back for six years.

What’s Next If a Transfer is Considered Fraudulent?

If a transfer is considered fraudulent, the trustee can recover the property or the value of the property and include it in the bankruptcy case. The exception is if the purchaser of the property was considered a “bona fide purchaser” who acted in good faith with no idea anyone else had a right to the property they purchased. The property also receives some protection if the purchaser made significant improvements after purchase.

In many instances, fraudulent conveyance is an issue that arises from real estate transactions related to bankruptcy. If you intend to sell or transfer ownership of your home or other real estate just prior to bankruptcy, it is essential you consult an attorney before completing the deal.

In order for your bankruptcy to go smoothly, you must abide by the law and protect every opportunity available to you to make your financial situation better. Understanding your situation and how bankruptcy laws apply can be tough, which is why the support of an expert is so important. For a general overview of bankruptcy terms, visit uscourts.gov.

Want to learn more about fraudulent conveyance or any other bankruptcy term? Contact the law office of Frank J. LaPerch, PC at 845.942.5500.

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