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What's the difference between a property transfer and a fraudulent conveyance?

Protecting property through transfers may be questioned in bankruptcy

There is a fine line between legitimate property transfers and fraudulent conveyances made before a petition is filed with the U.S. Bankruptcy Court. Unless people handle property transfers within the limits of the law, they could have their case denied and find themselves worse off than before filing.

"In a misguided effort to protect the property, the debtor might decide to transfer ownership to a relative, or a trusted friend, without being paid fair value for the item," writes Minnesota attorney Craig Andresen for the Bankruptcy Law Network. "The debtor no doubt believes this will shield the property, because if he no longer owns it, how could it be taken by a creditor or by the bankruptcy trustee?"

For those in a Chapter 13 bankruptcy, when a court-ordered payment plan allows debtors to keep their assets, transferring property improperly may result in having their plan denied. If that happens, the court is likely to convert their case to a Chapter 7 action, in which their assets could be sold to pay creditors.

If the trustee suspects that a transfer has been made to protect the property from being taken by a creditor in a Chapter 7 petition, the court can obtain the asset, sell it to pay the debtor's bills and deny the bankruptcy by refusing to discharge unsecured debts in the case.

From the court's standpoint, all creditors must be treated equally by sharing the value of the debtor's assets. According to the United States Courts website, the bankruptcy code forbids a debtor from moving property to another's possession for one year before filing. If any gift or transfer is made for "inadequate consideration," a trustee can recover the property or its value. In addition, bankruptcy regulations allow the trustee to recover transfers that were made for less than "fair [market] value" during the two years before the petition was filed.

In cases of "constructive fraud" - in which there is no fraudulent intent by the debtor - any property transfer made to protect a single creditor from loss is prohibited. However well-intentioned, the debtor cannot take such steps to protect others from the fallout of their court action. Even in non-bankruptcy situations, assets that are moved to a new owner to prevent a creditor from obtaining it are prohibited. Most state laws allow creditors to recover the transferred property if fair value was not paid for it or if the motive of the debtor was to evade an unpaid bill.

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