Legal Definitions - fraud on creditors

Fraud on creditors refers to any action taken by a person or entity (the debtor) with the specific intent to deceive, hinder, or delay their creditors from collecting debts owed to them. This often involves transferring assets out of the debtor's reach, making it appear as though the debtor has fewer assets than they actually do, or making it difficult for creditors to seize those assets to satisfy legitimate debts.

A common form of fraud on creditors is a fraudulent conveyance, where assets are transferred for little or no value to a third party, specifically to keep them away from creditors who have a legal right to those assets.

• Example 1: Individual Avoiding Judgment

  Imagine a person who has just lost a significant lawsuit and is ordered by the court to pay a large sum of money to the winning party. Before the winning party (now a creditor) can take steps to collect this judgment, the losing party quickly "sells" their valuable antique car to a close relative for a price far below its actual market value. The understanding between them is that the relative will hold onto the car until the legal issues blow over.

  This action constitutes fraud on creditors because the losing party is intentionally moving a valuable asset out of their possession and into the hands of a trusted third party, specifically to prevent the legitimate creditor from seizing it to satisfy the court judgment. The sale for an inadequate price further indicates the deceptive intent.

• Example 2: Business Owner Before Bankruptcy

  Consider a small business owner whose company is facing severe financial difficulties and is on the verge of filing for bankruptcy. Knowing that their personal assets might be at risk to cover business debts, the owner transfers ownership of their expensive lake house to their adult child for a symbolic payment of one dollar, just weeks before filing the bankruptcy petition.

  This is an act of fraud on creditors. The business owner's intent is to shield the valuable lake house from being included in the bankruptcy estate, thereby making it unavailable for the business's creditors to claim. By transferring it for virtually no consideration, they are attempting to prevent creditors from recovering their losses.

• Example 3: Corporate Asset Stripping

  A technology company is struggling and anticipates defaulting on its loans from several banks. Just before the company officially declares insolvency, its director creates a new, separate company owned by the director's spouse. The director then transfers all of the original company's valuable intellectual property (patents, software licenses) to this new company for a negligible fee, without proper valuation or board approval.

  This scenario illustrates fraud on creditors because the director is deliberately moving the most valuable assets of the original company out of its reach. This action prevents the banks and other creditors of the original company from accessing these assets to recover their outstanding loans when the company goes into liquidation, effectively stripping the company of its value for the benefit of the director's family rather than its legitimate creditors.