A fraudulent conveyance, or fraudulent transfer, is an attempt to avoid debt by transferring money to another person or company. In bankruptcy it's a transfer of the debtor's assets to a third party, with the intent to prevent creditors from reaching the assets. You can be sued in civil court for a fradulence transfer.

The Classic Fraudulent Conveyance

The classic fraudulent conveyance occurs when a person intentionally transfers property to another with the intent to defraud, hinder, or delay a creditor’s ability to collect on a debt. For example, let’s say a car dealership finances a car for a buyer based on the buyer’s credit report and bank account funds. Later, the buyer transfers his bank account to his friend but maintains control over the funds, and stops making payments on the car. In this scenario, the dealership would be unable go after the buyer’s bank account for payment because it’s no longer in the buyer’s name. If it can be established the only purpose for transferring the account was to defraud, hinder, or delay the dealership’s ability to collect on the debt, then a fraudulent transfer has occurred, and the dealership has various available remedies in order to collect on the debt.

In many cases, it’s difficult for the creditor to prove the intent behind a transfer was merely to defraud, hinder, or delay a collection. In these cases, a court may look for certain tell-tale signs that are common in these types of transactions. These signs include a transfer that was purposefully kept secret and hidden from the public, a failure to record a deed in a property transaction, or when a person gives away all of their assets. If any of these examples are present, a court may infer a fraudulent intent, helping the creditor’s case against the debtor.

Unintended Fraudulent Conveyance

There is a second type of fraudulent transfer that does not require the requisite intent as demonstrated in the above classic example. This second type of fraudulent conveyance occurs when a person is rendered insolvent or without any means to pay debts as the result of a transfer. A good example of this is when a grandparent transfers a house to a family member in order to avoid the complicated will or trust procedures. If the grandparent files for bankruptcy after, and as a result, of the transfer, a bankruptcy court may be able to undo the transfer and force the sale of the house to satisfy any debts.

Governing Law

In the United States, fraudulent transfers are governed by either the Uniform Fraudulent Transfer Act (“UFTA”), which has been adopted by 43 states including the District of Columbia, or the laws of bankruptcy. States that do not follow the UFTA include:

• Alaska
• Kentucky
• Louisiana
• Maryland
• New York
• South Carolina
• Virginia

If a fraudulent transfer occurs in any of the states not listed above, the UFTA provides guidelines and remedies available for the creditor. In some cases, and without the assistance of a bankruptcy, a creditor will be able to recover the property fraudulently transferred from the property receiver. Or, a court can order a sale of the property and the proceeds will be used to pay off the creditors.

If a fraudulent transfer occurs in one of the states above, the creditor may have to use the power of the bankruptcy courts to void the transaction. In these cases, the remedies available are similar to those under the UFTA, meaning the creditor may be able to void the fraudulent transfer.

How to Avoid a Fraudulent Transfer

The best way to avoid a fraudulent transfer is to be honest with creditors regarding personal assets and ability to pay debts. Creditors are usually sophisticated in tracking personal assets, so any attempt to hide or transfer property is typically quickly revealed. 

Additionally, some individuals may be accused of issuing a fraudulent transfer even if they didn’t intend to defraud a creditor. Regardless of intent, if a person is left insolvent or without the ability to pay off debts, then creditors may be able to void a transfer. These situations tend to present later in life when a person contemplates their legacy, thus contacting an estate planning attorney is a terrific option in order to ensure the legality of property transactions.