Property (real estate or any other type) transactions before or during a bankruptcy proceeding can lead to legal complications if not handled correctly. If someone knowingly transfers property ownership in an attempt to reduce the amount given to a creditor in a bankruptcy case, that will be viewed as a “fraudulent transfer.” If that has occurred, the bankruptcy trustee can undo the transfer by filing a lawsuit against the party that received the property so that the property’s value can be recovered and distributed to creditors.
When preparing initial bankruptcy paperwork, the debtor must disclose any property transfers that occurred in the previous two years. After the case has been filed, the trustee will review these transactions for anything deemed fraudulent.
The “Badges” of Fraud
The trustee and the court will look at some of these factors when determining if a transfer is fraudulent:
- Selling a property for less than fair market value: Courts will consider the property’s actual value compared to the spirit of which the transaction was completed.
- Transferring ownership to another party but keeping possession or control of the property for internal use: This presents various issues as the debtor still uses the property for his/her own uses.
- If the debtor became insolvent due to the transfer or was insolvent when the transfer was made. An insolvent person cannot pay his debts as they become due, so a transfer made while insolvent or that makes the transferor insolvent is suspect.
- If the debtor was engaged in business or a transaction, or about to, any property remaining with the debtor was an unreasonably small amount of capital. A business must have a certain amount of capital on hand, and if it transfers assets away at discounted values, those transfers could be suspect.
- Any peculiarities in the transfer itself: Other red flags could be raised about the transaction.
How Trustees ‘Unwind’ the Transfer
If the above badges of fraud are present, the trustee’s duty is to find the transferee (the person the debtor transferred the property to) and get the property back. In certain circumstances, the trustee will file a lawsuit to recover the property or its value. This will have the effect of making the transferee a creditor of the debtor in the bankruptcy case.
The aforementioned review of transfers is known as the “look back” period, and this timeframe can increase to as much as ten years for property transferred to a self-settled trust.
It’s important to consult a qualified bankruptcy attorney to understand the technical language of situations like fraudulent transfers. The team at Natural State Law understands how to proceed with property transactions in a viable and legal way. Call us today at (501) 916-2878 to learn more about how we advise Little Rock clients through bankruptcy.