Federal bankruptcy law and state law allow for certain transactions to be avoided in bankruptcy if the transactions were carried out with an intent to defraud creditors. In addition, discharge from bankruptcy may be denied if the trustee assigned to oversee the case determines the debtor engaged in fraudulent transactions. Many debtors have bankruptcy fraud questions so it is important to understand what type of behavior raises flags with the courts.
Most bankruptcy fraud questions asked by debtors deal with what type of behavior is allowed leading up to the filing of bankruptcy. Debtors often want to know whether it is permissible to transfer some or all of their property to family members or friends in order for the property to stay out of reach from creditors. Generally transfers of property made prior to filing bankruptcy are avoidable and the property, if it is not able to be exempted, will be available to repay the creditors, if necessary. Bankruptcy fraud questions also focus on whether nonexempt property can be converted to exempt assets.
Although the federal bankruptcy code is rather liberal in the approach to what types of asset conversions are allowable, prohibiting only transfers made with an actual intent to defraud creditors, the bankruptcy code also allows trustees to use state law to avoid certain transfers. For example, in California, a trustee can avoid pre-filing transfers of nonexempt to exempt assets if the transfers violate the Uniform Fraudulent Transfers Act (UFTA).
In addition to questionable transfers, trustees also want to ensure that the debtor fully disclosed all relevant information in the schedules accompanying the bankruptcy petition. The trustee will often question the debtor if they believe a schedule was filled out improperly or if the trustee believes property was intentionally omitted. Those with bankruptcy fraud questions should consult with a bankruptcy attorney in order to appropriately prepare for bankruptcy planning and filing.