December 15, 2019

FBI Warns Against Bankruptcy Fraud

My Bankruptcy Law Network colleague Rachel Foley from Kansas City has written a useful article on the Bankruptcy Law Network blog that brings to light a problem that many debtors (and perhaps many debtors’ attorneys) don’t think about too much – bankruptcy fraud.

FraudIn my practice I observe that when they come to meet with me many prospective bankruptcy filers are angry – angry at harassing creditors, angry at their employer for cutting hours or jobs, and angry at some of the rules that apply when one files bankruptcy.   Despite what some in Congress may say, no one wants to file bankruptcy and I have met many very nice, reasonable people who feel that they played by the rules and now they are going to have to start all over at age 40, 50 or older.

The net result of this anger sometimes is a sense of “us against them.”  Sometimes this manifests itself in an attitude that the debtor will follow the rules mostly but who is going to harm if they don’t reveal a cash payment to a relative or the transfer of an old car to a brother.

As Rachel points out in her fine post, this sort of an attitude can really get you in trouble.

When you sign your name to a bankruptcy petition, you are declaring under oath that the information contained therein is truthful and accurate.  If you leave something out intentionally you may not get caught, but, then again you may.  The  U.S. Trustee and the U.S. Attorney have been known to prosecute debtors to set precedent. [Read more…]

Should You Pay Back Your Parents or Siblings Before Filing Bankruptcy

Should you pay back your parents, siblings, friends or other relatives before filing bankruptcy?  I get this question frequently as many of the potential clients I see have borrowed money from private sources in an effort to avoid bankruptcy.

My Bankruptcy Law Network collegue Susanne Robicsek answers this question clearly and consisely in a 2007 post on the BLN blog.  Susanne’s advice remains valid – do NOT pay back a personal loan prior to filing bankruptcy without first talking to a bankruptcy lawyer.

There are two potential issues if you pay back mom or dad, or the next door neighbor.  First, there is the problem of “preferences.”   Congress recognized that debtors would be tempted to favor certain creditors in a pre-bankruptcy setting.   The bankruptcy code contains a section that addresses so called “preferential” payments on old debts. [Read more…]

What is the difference between a preference and a fraudulent transfer?

I see a possible trap for the unwary in one of the October 17, 2005 changes to the Bankruptcy Code. I do not have a firm answer to this and I welcome any suggestions or thoughts.

Bankruptcy Code Section 547 empowers the trustee to avoid a transfer (preference) between the debtor and an insider on account of an antecedant (pre-existing) debt if the payment was for a debt incurred within one year of the bankruptcy filing.

Bankruptcy Code Section 548 empowers the trustee to avoid a “fraudulent” transfer to any party within two (2) years of the bankruptcy filing – fraudulent being defined in the Code Section as essentially a transfer made with actual intent to hinder a creditor or for less than full value and made when the debtor was insolvent. Prior to October 17, the lookback period in this section was one year, not two years.

Finally, Bankruptcy Code Section 727 authorizes the Court to deny a discharge to a debtor who, with the intent of defrauding creditors or the estate, has transferred property within one year of filing.

I have a case where my potential client had borrowed assets from an insider to use as security for a bank loan. He never took out the bank loan and therefore never made use of the loan of the assets. When it became obvious that he would not need the bank loan, he then transferred that property back to the insider a year and two months ago.

The insider had requested the return of the assets once it became clear that my client would not need them. The transfer was made when the debtor was insolvent.

Does it make a difference that the debtor’s transfer was in the form of a debt repayment (vs. an outright transfer)? Is there a different standard of review if a “preferential” transfer is outside the preference period but within the fraudulent transfer period? Would this return of assets be considered “ordinary course of business.” Should I list it on Question 10 of the Statement of Financial Affairs?


“Fraudulent” Transfer of Assets in Georgia

A fraudulent transfer of assets prior to bankruptcy may result in a denial of your Chapter 7 bankruptcy relief.  Section 727 of the Bankruptcy Code says that your transfer of assets within the year prior to your filing for bankruptcy, with the intent to defraud, hinder or delay creditors, can be grounds to deny your Chapter 7 discharge.

Fraudulent transfer issues usually arise when an individual transfers title in real or personal property to a spouse or other relative to protect that property from the reach of a pursuing creditor.

In the following real life cases, the fraudulent transfer rules that apply in Georgia bankruptcy cases yield very harsh results:

In the Davis case1., the debtor transferred a house to his wife, then, after meeting with a lawyer, had his wife transfer it back to him. He then filed Chapter 7 within a year of getting the title back in his name. The 11th Circuit Court of Appeals said “no” and denied his discharge. Even though he had tried to fix the problem, he still acted with wrongful intent within a year of filing.

In the Future Time case 2, a debtor quit claimed his interest in a house to his wife. The house was fully mortgaged and no equity was transferred.   The Bankruptcy Court said “no” – it does not matter that no value was transferred; the wrongful intent was there.

In Georgia, any transfer of property in the year prior to filing – especially that of a house or a car – is likely to create problems. Even transfers to strangers for full value can be a problem.

What can you learn from this?

  • if someone has a claim for money damages against you, do not try to protect your assets by giving them away or selling them for pennies on the dollar – this will not work to protect those assets
  • before trying to dispose of any property when facing a claim for money damages, talk to a lawyer first
  • if you have already transferred property come totally clean with your bankruptcy lawyer – not telling him will only make matters worse

Ironically, Georgia bankruptcy courts are more forgiving and willing to give a debtor the benefit of the doubt when it comes to a debtor’s failure to disclose assets, which can also be a basis for the denial of discharge under Section 727. In transfer cases, just about any transfer for any reason will likely be deemed “fraudulent” and will prohibit you from getting bankruptcy relief.

  1. In re Davis, 911 F. 2d 560 (11th Circuit 1990)
  2. Future Time, Inc. v. Yates, 26 BR 1006 (M.D. Ga. 1983).

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