Prior to filing for bankruptcy, there are some steps that you can take through prebankruptcy planning to protect your remaining assets legally. However, transferring assets with the sole purpose of preventing or avoiding a creditor’s collection attempt is considered a fraudulent transfer and prohibited by law. Any violation of fraudulent transfer laws is subject to civil and criminal liability.

What Qualifies as a Transfer?

Generally, the movement of property, both tangible and intangible, or interest in property that reduces the value of the transferor’s assets, is considered a transfer. Transfers can include the incurring of a new, additional obligation that will reduce a debtor’s assets by increasing debt. They can also be incurred indirectly, such as a partnership incurring legal fees for an individual partner.

What Makes a Transfer Fraudulent?

A fraudulent transfer is one in which the debtor moves assets in order to hide them to delay payment of a debt or otherwise defraud a creditor. Fraudulent transfers can be done with actual or constructive (unintentional) intent.

How Is a Transfer Evaluated for Fraud?

To determine whether a transfer was fraudulent, evaluators will consider the transferor’s solvency. If a financial accounting indicates that the transferor is insolvent, then the transfer itself will be evaluated for fraud.

Actual Fraud vs. Constructive Fraud

If the transfer was made by an insolvent transferor without adequate value in return, or the transfer was made in secrecy with the intent to hide assets, delay payment of debt or defraud a creditor, then the transaction is clearly fraudulent and prohibited.

However, it is also possible for a transfer to be constructively fraudulent. Even if there is no actual intent to defraud, if a transfer is made when the debtor is insolvent, before the debtor is about to incur debts beyond his or her ability to pay, or the transfer leaves the debtor with unreasonably small assets, then the transfer may also be considered fraudulent and prohibited.

What Happens If a Transfer Is Deemed Fraudulent?

If a transfer is deemed fraudulent, then the transfer itself is voidable and the transferor, as well as any other parties involved in the transfer, is subject to civil and criminal prosecution.

Do I Need a Bankruptcy Attorney?

If you are facing bankruptcy or you have engaged in any transactions that may be considered fraudulent, you should seek assistance from an experienced bankruptcy attorney immediately. Bankruptcy procedures are complicated and it is important to obtain legal advice to ensure that you are following the law.