An effective asset protection plan must also be a legal asset protection plan. That means the plan must be set in motion before any creditor claims arise. If not, any transfers you make in an effort to protect your assets, may be considered “fraudulent transfers.” If that happens, both you and the person you transferred the assets to, may be in trouble. Understanding the problem with fraudulent transfers can keep you on the right side of the law.
How “fraudulent transfers” are defined
A fraudulent transfer, or a fraudulent conveyance, occurs when a debtor transfers property or assets in an effort to avoid a creditor’s claim. The most common example is when a debtor tries to “sell” everything to a spouse or business partner for next to nothing, in order to effectively hide those assets. A “transfer” includes any and every method of parting with an asset. It can include allowing someone to place a lien on an asset. Assets do not include property that is encumbered by a valid lien.
What happens if a court says my transfer is fraudulent?
A transfer of an asset for purposes of asset protection, cannot be made once you have received a demand for payment from a creditor. If a court determines that a transfer is a sham to avoid a creditor, the transfer will be set aside and the assets must be returned.
Undoing the transfer is not the only consequence. Both the debtor and the transferee who participated in the fraud, may be liable for legal fees paid by the creditor in bringing a legal action to collect the debt. Another consequence is that the debtor will likely lose the ability to discharge a debt in bankruptcy that was determined by a court to be involved in a fraudulent transfer. Under the Uniform Fraudulent Transfers Act, the creditor can also bring a claim against the person to whom the property was transferred.
What makes a transfer appear to be fraudulent?
Although there are other situations that may create suspicion, there are four very common circumstances that tend to raise a red flag for creditors and the courts: transfers to family or business partners, transfers made by insolvent debtors and transfers for no real value. These situations often cause concern for courts, especially when a demand for payment has actually been made a creditor.
The term “insiders,” refers to relatives, partners, or (if the debtor is a company) officers and directors, are often suspect. Any transfer to one of these individuals will typically face greater scrutiny than a sale to a neutral third-party. When a transfer is made when the debtor was insolvent or became insolvent soon after making the transfer, the court will often be suspicious. Insolvency occurs when the debtors total debts exceed his assets. Probably the most common sign of a fraudulent transfer is one that is made for little or no compensation. In other words, if you sell your car for $100, when the car is obviously valued much higher, it will appear that the transfer was fraudulent.
If you have questions regarding fraudulent transfers, or any other asset protection issues, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.