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What is fraudulent conveyance?

Fraudulent conveyance of property can jeopardize a bankruptcy case.

Even the suggestion of fraud in a bankruptcy case may place the petition to the U.S. Bankruptcy Court in jeopardy.

In the worst case scenario, trying to shelter certain assets from being included in a bankruptcy is actual fraud, which shows intent to hide belongings or pay off certain creditors by transferring property to them. In "constructive fraud," there may be no fraudulent intent by the debtor, because they see a property transfer or hidden asset as a way to protect one of their creditors from loss.

Often in cases of constructive fraud, a debtor has made a fraudulent conveyance of property for just this reason - a family member or close business associate is owed money, and the debtor wants to make sure they don't suffer by the individual's bankruptcy action.

From the court's standpoint, all creditors must be treated equally by sharing the value of the debtor's assets. If the trustee suspects that a property transfer has been made fraudulently, the court can obtain the property, sell it to pay creditors and deny the bankruptcy by refusing to discharge the debts in the case.

For those filing a Chapter 7 case, the bankruptcy code's section 727 forbids a debtor from moving property to another's possession for one year before filing. "If you make a gift or other transfer for inadequate consideration to anyone, whether they're in your family or not, a Chapter 7 trustee can recover the property or its value if your case is filed within one year afterward," according to BankruptcyLawFreeAdvice.com.

In addition, section 548 allows the court trustee to recover transfers that were made for less than fair value during the two years before the bankruptcy petition is filed.

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

However, BankruptcyLawNetwork.com states that debtors may be able to reverse their actions and avoid a claim of fraud against them. "In some jurisdictions, the property might be able to be transferred back into the debtor's name prior to filing the bankruptcy," the website reports. "Another strategy is for the debtor to reverse the transfer and then file Chapter 13 bankruptcy."

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