What Do You Do If the Debtor Has Transferred Assets?

Collections Training Resource
June 20, 2013 — 1,561 views  
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Fraudulent transfer is not uncommon. It is a debt transfer with malafide intentions to subvert a creditor’s attempt to make collections against assets. Typically, a debtor sells every asset he/she has to their spouse or any other person at incredibly low prices so that the creditors do not take away their assets. 

Actual and Constructive Fraud

In the law of torts, actual and constructive frauds are terms used quite frequently. In actual fraud, the intention is to defraud the creditor through fraudulent transfer. In addition, for actual fraud to take place, debt transfer should have been done within the specified time slot of one year prior to filing for bankruptcy. The intention to defraud is not always obvert, so the courts have put in place conditions and circumstances that show the intent to defraud.

Constructive fraud on the other hand does not require the intention to be proven. The two conditions in case of constructive fraud are that the debtor receives less than what may be considered reasonably equivalent, and the debtor is not able to repay. 

Non Fraudulent Transfer

Under certain conditions, a bargain is just a bargain--in which case it is not a fraudulent transfer. When the court determines that debt transfer is not fraudulent, it becomes a non fraudulent transfer. There is no formula that can determine whether reasonably equivalent value has been given or not. So, the courts will attempt to look at the circumstances under which the transfer was executed.

Some of the elements considered by the courts are:

  • Fair market value
  • Good faith
  • Competitiveness of bids
  • Net effect on property

In case the sale has taken place at fair market value in good faith, in addition to the two other factors identified above the transfer is then considered non fraudulent.

Fraudulent Transfer

Once the transfer is deemed fraudulent, the value of the property or the property itself may be recovered. The recovery in case of fraudulent transfer can take place from immediate purchaser or receiver or the subsequent receiver as the case may be. However, incase the debt transfer has been made to the “bonafide purchaser” the recovery cannot take place.

The bonfide purchaser would have purchased the property in good faith. He/she would not have known the outstanding rights that others had to the property. So, a bonafide purchaser gets to retain the property. In addition, there is one more exception to the recovery of property when substantial improvements to the property have been made.

In case of improvements on the property, those that made improvements get a lien on the property. In other words, while property transferred fraudulently can be recovered, there are at least two exceptions. These are bonafide purchaser and substantial improvements on the property. 

It is evident that fraudulent transfer of the property takes place when debtors attempt to get away from creditors using deceptive means, with clear intentions of deceiving them. So, the transfer of property in these cases will be nullified by the law and creditors can recover the value or property.  

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