Essentially, a transfer is characterized by the bankrupt individual transferring his property to someone else so that said property will not be included in the liquidated assets to pay off creditors.

Transfer of property judged to be fraudulent can be a cause of denial for a bankruptcy petition. In most cases, this prevents the petitioner from filing another bankruptcy petition within a specified length of time.


Two Kinds of Transfer

So how exactly does the court decide whether a transfer is done with the intent to defraud creditors? There are currently two types of transfer today and each one comes with several characteristics. If these characteristics are present, the transfer is considered fraudulent in nature and will prevent the granting of the petition:

  • Actual Fraud

There are two characteristics to actual fraud. First is that a transfer of property is made 12 months before filing a petition for bankruptcy. Second is that the transfer was made with the intention of defrauding a creditor or essentially preventing them from collecting on a liability.

  • Constructive Fraud

Constructive fraud is done under the banner of a sale. It is characterized by selling an item to someone else at a value that is far lower than the actual cost of the product. The second requirement is that during the time of sale, the petitioner must already be unable to pay off his debts or that he has a hard time paying those debts because of the sale. Ideally, a constructive fraud must also be done within the past 12 months before the filing of the petition; otherwise it wouldn’t be counted as fraud.

  • Providing Illegal Transfer

Note that in both cases, the intent to defraud the creditors must be proven. Hence, a transfer within one year after filing the petition doesn’t automatically mean that there was intent to defraud the creditors. In the case of Actual Fraud, the creditor must first prove that there was the intention to hinder collection of the liability. In the case of Constructive Fraud however, it must be proven that the selling price for the product is significantly less than what it would have sold for in the market.

What Happens if Transfer is Proven?

There are several possible consequences if it has been proven that a fraudulent transfer occurred. In most cases, the court simply requires that the property is taken back and applied to the bankruptcy case of the petitioner. Hence, sad property will be liquidated and used to pay off the creditors. The petitioner may also suffer sanction if intent is proven beyond reasonable doubt.

Note though that there are exceptions to the rule. If the buyer is bona fide or bought the item in good faith or has no idea of the intent of the seller, said property might be kept by him. Contractors who installed improvements on the property may also be given lien to guarantee payment for their work.

An experienced bankruptcy attorney should be able to help if you find yourself in the situation of having to disprove allegations of fraud with the transfer of property.