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Fraudulent Conveyances and Preferential Transfers in Bankruptcy

Bankruptcy law is an effort to balance the rights of creditors to protect their interests and debtors to free themselves from debt and get a fresh start. No one benefits from a system that puts borrowers in a situation where they are not able to support their families because they are swimming in debt. On the other hand bankruptcy law recognizes that creditors interests need to be protected from abuse. Clients occasionally ask whether they can transfer things to their friends or family members and than file bankruptcy.

Fortunately most people can keep the things they own, file bankruptcy and get rid of the debt. The law allows you to keep or exempt certain property and in most cases those exemptions are enough to protect the things you own. If however the assets cannot be exempted, those assets also cannot be transferred to others just before a bankruptcy case is filed to try to keep them from the reach of creditors or the bankruptcy trustee. This is where the balance tips in favor of the creditors. Transferring assets to others with intent to hinder, delay or defraud creditors will lead to a loss of a discharge and could even subject the parties to criminal prosecution. Bankruptcy law allows the trustee to sue the recipient of a fraudulent conveyance and to get the property or its value back if the transfer was made within 2 years of the bankruptcy filing. Maryland State law has similar provisions that allow the trustee to reach back as far as 3 years.

There is also a different type of fraudulent transfer. The kind that is not done to protect assets from the creditors but that still technically allowed someone to take something of value away from the bankruptcy estate. An example of this would be a large gift to a family member, done for legitimate purposes but still depleting the assets owned by the person who files bankruptcy. Another example would be the sale of a car or another asset for a lot less than what it is worth. This type of transfer will not get the debtor in trouble, causing the loss of a discharge or possible criminal charges but it would still be a transfer that could be avoided, allowing the trustee to sue the recipient for the return of the property or its value.

Preferential transfers are yet another way that bankruptcy will try to balance the rights of creditors. The principle is to make sure similar creditors are treated the same. Thus if a borrower pays a significant payment to his VISA card or other unsecured creditor within 90 days of the filing of the bankruptcy case the bankruptcy trustee can get the money back and share it equally with all the creditors. This is not because it is wrong to pay creditors but just to make sure no creditor is preferred over any other.

The situation of avoidance of preferences becomes more painful if the borrower has paid back mom, dad or another relative within one year of the filing. Despite the fact that the family member really did loan the money and it was expected that the debtor would repay it, the Chapter 7 trustee can get the money back. Obtaining good advise regarding this part of bankruptcy law is essential before filing a bankruptcy case. The Maryland bankruptcy attorney at Broumas Law Group can help you through these issues and insure your case goes smoothly.

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