What is the concern with transfers?

Bankruptcy attorneys and trustees are always asking about transfers of property, particularly in chapter 7 cases. Why do they care? A principal purpose of bankruptcy is to ensure a fair distribution amongst a debtor's several creditors. To that end, there are two kinds of pre-bankruptcy property transfers that can be a particular source of concern:

  1. A transfer to a creditor that gives the creditor more than they would have received in bankruptcy. Such a preferential transfer can come up either as a result of the debtor's action or the creditor's actions.
  2. Transfers that were designed to remove property from the reach of bankruptcy. Such a fraudulent transfer includes both a situation where there was actual intent to keep property from creditors as well as a situation where the transaction was a net loss to the debtor while the debtor was in poor financial condition. The second sort comes up more frequently as it is possible make such a transfer in good faith without any fraudulent intent.

The above are broad definitions of these two types of transfers. The statutory rules, both under the bankruptcy code and under North Carolina statute, have very particular qualities that a transfer must have to be considered preferential or fraudulent. There are requirements concerning timing, value, relationship of parties, financial condition, and more. Just because you made a transfer does not mean it is preferential or fraudulent, but it needs to be disclosed and analyzed by your attorney.

Transfers that do meet the full definition of a preferential or fraudulent transfer may be attacked by the bankruptcy trustee. This is more common in chapter 7 than in chapter 13. In the event the trustee decides to pursue a transfer, he or she will bring an adversary proceeding (lawsuit) against the transferee who benefited from the transfer. Any recovery would be used to pay creditors. It's a factual question best analyzed by an attorney fully informed of your circumstance whether it is desirable to the debtor for the transfer to be avoided.

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