Fraudulent Conveyance: What it is, How it Works

What Is Fraudulent Conveyance?

Fraudulent conveyance is the illegal or unfair transfer of property to another party via a bankruptcy trustee. One type, called "actual fraud," is meant to defer, hinder, or defraud creditors, or to put such property out of the reach of a creditor in anticipation of or during bankruptcy proceedings, according to the Uniform Voidable Transactions Act (formerly Uniform Fraudulent Transfer Act) and the federal Bankruptcy Code.

Fraudulent conveyance falls under civil law, not criminal, generally speaking. If the transfer of property is determined to be fraudulent, a court can require the person holding the assets (the person to whom the conveyance was made) to hand the assets, or an equivalent monetary value, over to the creditor.

Fraudulent conveyance is also called a fraudulent transfer.

Understanding Fraudulent Conveyance

Two types of fraudulent conveyance exist under current law: actual fraud and constructive fraud. Under 11 U.S.C. Section 548, actual fraud occurs when a debtor intentionally donates or gets rid of a property as part of an asset protection scheme.

The look-back period is two years before the filing of the bankruptcy petition. Intent to defraud must be proven for a defendant to be found guilty, but usually, certain actions are interpreted as intended, such as setting up shell corporations, scheming to retain control of transferred property, or transferring assets to an individual with whom the defendant has a relationship or tacit agreement.

Constructive fraud occurs if a debtor receives less than "reasonably equivalent value" for a property that they transfer for the benefit of creditors and if the debtor "was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation," states Section 548 of the Bankruptcy Code.

"Reasonably equivalent value" is often subject to disputes between debtor and creditors, but this part of the law is designed to allow creditors to claw back compensatory amounts into the bankruptcy estate. Unlike actual fraud, no finding with regard to the intent of the debtor is necessary.

Special Considerations

Fraudulent conveyance can also apply to small amounts of money—for instance, in a case where an individual sold all of their possessions for an insignificant amount of money to a spouse, relative, business partner, or friend. The other type of fraudulent conveyance, "constructive fraud," occurs when creditors receive less than they have a right to under the law.