If I file for bankruptcy, my debts will be discharged, right? Well, not your student loans, or your secured loans, or mortgages securing real estate. And not some taxes. Everything else, right? Well, no debts that were secured by fraud are dischargeable.
How Does the Bankruptcy Trustee Find Fraud?
First, it is the job of an experienced bankruptcy lawyer to keep his or her clients from committing fraud. It should not be hard. Many clients claim to want to undertake transactions that would be considered fraudulent conveyances. An experienced bankruptcy attorney works with the client to avoid all such conveyances. If a conveyance has already been made, an experienced bankruptcy attorney works with the client to determine if bankruptcy is a viable option, or if there are other options to deal with the client’s financial problems. Many times there are.
A bankruptcy trustee has only a few ways to determine fraud. But if he or she finds it, the remedy is severe. It is never worth it to try to commit a fraud on the Bankruptcy Trustee or the Bankruptcy Court. The Trustee will carefully review the debtor’s Petition and Schedules. The Trustee will look at all real estate owned by the debtor, and will do a search for prior real estate. Most importantly, however, the Trustee has the power of taking the debtor’s sworn statement, at the 341 Creditor’s hearing and, if that is not sufficient, at a subsequent deposition.
Moreover, the Trustee has the power of the federal Bankruptcy Court behind it.
In a Colorado case in which the debtor tried to conceal assets, the Trustee filed a Complaint in Bankruptcy Court to prevent him from discharging his debts. The case involved a complicated set of facts. The debtor, a Mr. Kendall, owned shares in a bank, a printing company and land. The debtor entered into a series of transactions in which he borrowed money on behalf of his printing company, from the bank, in 2005, 2006 and 2008. The bank went under and sold off Mr. Kendall’s loans to a third party. They pursued Mr. Kendall, however, he transferred assets, as best we can understand, as follows: some to a newly formed LLC (limited liability company) and some to his new wife, in 2007. The wife then began transferring assets to an off shore holding company, in 2010.
When the debtor filed bankruptcy in 2010, the Trustee filed a proceeding to stop get at the former assets, the allegedly fraudulently transferred assets, of the debtor. The law allows the Trustee to both set aside a fraudulent transfer, and to recover fraudulently transferred assets.
In the instant case, the Court found “actual fraud” based on the dates of the transfers and the closeness of the parties involved. (There was a mother in law too.) Further, the Court found that there was also “constructive fraud” in that even if the debtor did not act with actual intent, because the following three criterions were satisfied: 1. Within two years. 2. The debtor got less than full value for the transfer. And 3. Whether the debtor was insolvent when the transfer was made or the transfer made the debtor insolvent.
Bankruptcy Fraud Cases Should Not Happen
Work with an experienced bankruptcy lawyer. Tell the whole truth. It is not hard to see how Mr. Kendall’s case should have been handled. Instead of running up against potential criminal charges, no discharge of debts, and lawsuits against his wife, his mother-in-law, his company, and otherwise, perhaps he could have negotiated with his creditors. Perhaps there were other options.
Don’t get into Mr. Kendall’s situation, even if it’s just one transfer. An experienced bankruptcy lawyer will enable you to work through the problem and put you on the best path.