Fraudulent Transfers and Chapter 7 Bankruptcy

If you are thinking about filing for Chapter 7 bankruptcy in the Tampa area, it is important to understand limitations on property transfers and what might be considered fraud. Under 11 U.S. Code § 548, debtors have certain obligations with regard to property transfers before they seek bankruptcy protection. Generally speaking, debtors cannot transfer property in certain ways within two years prior to the date of filing for bankruptcy, or else those transfers may be considered fraudulent. Even if a debtor does not aim to commit fraud, it is possible that debtors might not understand that certain actions can be viewed as fraudulent under the law.

How Does the Law Define Fraudulent Transfers?

When you file for Chapter 7 bankruptcy—also known as liquidation bankruptcy—you will need to liquidate all of your non-exempt assets in order to receive a bankruptcy discharge. In other words, Florida law allows some of your property will be exempt, including up to $1,000 of personal property (such as clothing, artwork, and furniture), up to $1,000 of equity in your automobile, certain savings accounts, and certain benefits and pensions. Florida debtors can take advantage of an extremely generous homestead exemption that allows debtors to exempt an unlimited amount of home value, as long as it is the primary residence. If a debtor chooses not to use the homestead exemption, she or he will also be eligible for a “wildcard” exemption that permits a debtor to exempt up to $4,000 in personal property.

Aside from exempt property, a debtor cannot simply transfer property prior to filing for bankruptcy in order to avoid liquidation (or, in other words, to keep the property without including it in the bankruptcy filing). According to the Bankruptcy Code, fraud can be actual or constructive. In cases of actual fraud, a debtor transfers property in order to defraud his creditors and to avoid having the property included in the liquidation of his assets. Constructive fraud does not involve the debtor aiming to defraud creditors, but instead involves a situation in which a debtor transfers property for much less than it is worth, perhaps in order to pay off some debts in order to avoid bankruptcy.

Examples of Fraudulent Transfers in Chapter 7 Bankruptcy

What do we mean when we talk about actual and constructive fraud in liquidation bankruptcy? We can give you a couple of examples to explain:

  • – Example of actual fraud: A debtor filing for Chapter 7 bankruptcy has an art collection worth $25,000, and he does not want to have to sell it in order to repay creditors. Since debtors cannot, under any circumstances, exempt $25,000 worth of personal property like an art collection in Chapter 7 bankruptcy, this property would not be exempt. To hide the property from the bankruptcy trustee and the bankruptcy court, the debtor transfers the collection to a close friend within two years from the date of filing for bankruptcy protection.
  • – Example of constructive fraud: We can use the same debtor from the example above to show the difference between actual and constructive fraud. So, if a debtor has an art collection worth $25,000, he knows this will not be exempt if he files for liquidation bankruptcy. However, within two years before he files for Chapter 7 bankruptcy, he attempts to sell the art collection in order to pay off his debts. Since it is difficult to sell an entire expensive art collection, the debtor accepts only $2,500 for the entire collection in order to repay some of the money he owes. However, less than two years later, he files for Chapter 7 bankruptcy.

Contact a Bankruptcy Lawyer in Tampa, FL

Filing for bankruptcy in Tampa Bay is extremely complicated, both for individual debtors and for small business owners. Whether you are an individual who is seeking bankruptcy protection or if you are filing for bankruptcy related to business debts, it is extremely important to work with an experienced bankruptcy attorney in Tampa to ensure that your debts can be discharged. Contact Tampa Law Advocates, P.A. to learn more about how we can assist with your case.