Legal Definitions - fraudulent transfer

A fraudulent transfer occurs when a person or entity (known as the debtor) gives away or sells an asset for significantly less than its true market value, often with the intention of preventing creditors from claiming that asset. This usually happens when the debtor is facing severe financial difficulties, such as insolvency or impending bankruptcy.

The core idea behind a fraudulent transfer is that the debtor is attempting to hide assets or place them beyond the reach of those they owe money to. In a bankruptcy case, a court-appointed trustee has the legal authority to identify and reverse such transfers. This means the property can be brought back into the bankruptcy estate and then sold to help pay off the debtor's legitimate creditors.

For a transfer to be legally considered fraudulent, two main conditions are typically examined:

• The debtor received less than a reasonably equivalent value for the asset. This means the price paid or benefit received was substantially less than what the asset was truly worth at the time of the transfer.
• The debtor was already insolvent (meaning their debts exceeded their assets, or they couldn't pay their debts as they came due) at the time of the transfer, or they became insolvent as a direct result of making that transfer.

Examples of Fraudulent Transfers:

• Example 1: Business Asset Sale

  A struggling manufacturing company, aware that it is on the verge of bankruptcy, sells a specialized piece of equipment valued at $200,000 to the owner's cousin for only $20,000. The company then uses the $20,000 to pay off a personal loan of the owner, rather than its business creditors.

  How it illustrates: The company (debtor) transferred a valuable asset for a fraction of its true worth ($20,000 for $200,000 equipment) while facing insolvency. This action was likely intended to keep the equipment out of reach of the company's legitimate creditors. A bankruptcy trustee could investigate and potentially recover this equipment for the benefit of those creditors.

• Example 2: Real Estate Transfer

  An individual who has accumulated significant credit card debt and is facing foreclosure on their home decides to "sell" a vacation property they own, valued at $300,000, to their adult child for $100. The individual continues to use the property for vacations, but legally claims it is no longer theirs.

  How it illustrates: The individual (debtor) transferred a high-value asset (the vacation property) for almost no consideration ($100 for $300,000 property) at a time when they were clearly insolvent due to overwhelming debt and foreclosure. This transfer was made to shield the property from their creditors, including the bank holding the mortgage on their primary residence and the credit card companies.