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Definition of Fraudulent Conveyance and How To Avoid It

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by , 08-08-2011 at 03:53 PM (1098 Views)
A transfer or conveyance is fraudulent if a debtor transfers an asset to a third party in order to place an asset out of the creditors reach. Generally, under state law, creditors may set aside or prevent Fraudulent Conveyances to third parties. In Bankruptcy proceedings, a trustee has the power to set aside or recover the fraudulently conveyed asset if the conveyance occurred within 2 years of filing a bankruptcy petition.

In order to avoid making a fraudulent conveyance, the debtor must understand how the Bankruptcy Courts define fraudulent transfers. A transfer made without meeting the following conditions is not fraudulent and cannot be set aside in a bankruptcy proceeding.

First, the timing of the transfer affects whether it may be reached in a bankruptcy proceeding. Some transfers take a number of steps to be considered complete. A transfer cannot be set aside if it occurs more than two years prior to bankruptcy. For example, the process of the sale of land may begin more than two years prior to bankruptcy but the transfer is not complete until the deed is recorded. If recordation occurs within two years of bankruptcy, the transfer can be set aside if it is fraudulent.

Second, a conveyance is fraudulent if it was made with the "actual" intent to defraud, hinder or delay creditors. This requires proof of intent, often evidence that is hard to obtain without overt actions by the debtor. Therefore, courts have set out a number of conditions that create presumptions of actual intent. Some examples of conditions include: a Ponzi scheme or the debtor is threatened with litigation or the asset is transferred to a newly created corporation. Overall, actual intent is determined on a case by case basis with the consideration of all facts surrounding the transfer that may indicate an intent to defraud, hinder or delay creditors.

Third, if actual intent cannot be proven, a conveyance may be constructively fraudulent. Constructive fraud occurs when: (1) the debtor receives less than fair value for the transfer and (2) the debtor was unable to pay debts at the time of the transfer or the debtor knew that he would not be able to pay debts as a result of the transfer. Less than fair value is easily proven for gifts, where no money is exchanged. Otherwise determining what is fair value requires consideration of such things like was the transfer made in good faith, what is the fair market value at the time of the transfer. A transaction that meets fair market prices or made with good intentions to earn back reasonable value will avoid a fraudulent conveyance violation.
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Bankruptcy Law

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