Something that can surprise people when they file for bankruptcy is what is called a fraudulent conveyance. While the term “fraudulent conveyance” can sound almost criminal, but it is nothing of the sort. It refers to something a person may have done in the years before filing for bankruptcy that because of how the law is written can cause problems now.
The theory behind fraudulent conveyance law is that when a creditor loans you money, the creditor is looking at your complete picture, seeing what you earn, what you own and what your past credit history is. The bank may give you a regular loan thinking that you own a house and if the worst happens, they can always put a lien on your house. While this may have been true many, many years ago when a bank was a local business and the local bankers knew the people in their community, these days it is a complete fiction. Banks loan money based on your past performance with them and based on your credit score. The fact that you own something, like a house or a car, usually means nothing in their decision whether or not to loan you money.
The law on fraudulent conveyance was written in the old days, and never changed. The idea was that if a loan was made to you based on the banker’s knowledge that you owned a house, a car or something else, it was unfair to the bank for you to give that asset away. Thus, if you transferred your house to your children, or gave you car away to a relative, it was considered a fraudulent conveyance if you did not get full value in return. If the bank then had to sue you for the loan, it could have a court reverse the transfer so that it had that asset back in your name and could put a lien on it.
When Fraudulent Conveyance Occurs
A common scenario for making a fraudulent conveyance is when someone is opening a new business, or sees their present business having difficulties, and transfers their house to their spouse. Another common way this comes up is where family members change who is on the deed to a house.
For the conveyance to be considered fraudulent, though, the person making the transfer had to be either insolvent when the transfer was made, or the transfer had to make the person insolvent. Insolvency in this case means either that one’s liabilities exceed one’s assets, or that one cannot pay their regular bills as they become due. Thus, if someone whose assets total $100,000 and who has $50,000 in debts gives away a $20,000 car, it is not a fraudulent conveyance, but if their debts were $100,000, it would be.
A fraudulent conveyance, in New York, matters only for six years. If the transfer was made over six years ago, it cannot be reversed.
The way this typically comes up in a bankruptcy case is that someone was on a deed to a family house and at some point in the past six years had their name taken off of the deed. They then file for bankruptcy and the trustee learns that at some point in the past 6 years they were on the deed of a house. The trustee then has the power to reverse that transfer, have the house put back in the debtor’s name and sell that interest for the benefit of the creditors.
It also often happens that someone has the income to support a house but their credit is not good enough, so a relative co-signs the mortgage note or even buys the house in their name, never intending to really own the house or live there. Then, after the closing, they sign a deed to transfer the house to the “real” owners. If the co-signing relative files for bankruptcy within six years, even though they never really “owned” the house or put any money into it, this can been seen as a fraudulent conveyance.
This is why we ask our clients not only whether they own any real property now, but ask them if they ever owned any real property. We also ask if they have every taken their name off of anything, every had their name on someone else’s property, and so on. We ask the question in several ways because clients often never really considered themselves to be actual owners of the property. We do not want there to be any surprises in their bankruptcy.
If you would like to discuss your options or have questions about bankruptcy, please contact our Queens bankruptcy attorneys for a free consultation.