Bankruptcy allows individuals to discharge debts — but bankruptcy is designed to protect creditors’ rights, not just debtors’ rights.
In some cases, debtors may attempt to transfer or sell their property to another person to keep it away from their creditors and hinder creditors’ ability to collect what they are owed and entitled to receive even though bankruptcy has been filed. This is a form of actual fraud known as fraudulent conveyance. Here are a couple of examples of fraudulent conveyance:
Hiding assets that could be used to pay creditors
A creditor could attempt to collect a debt from a debtor. The debtor could have savings in their bank that would resolve their debt obligation. Instead of paying the debt with their savings, the debtor may withdraw the money and give it to a family member or friend to hide until the bankruptcy is resolved.
Similarly, debtors may try to sell property or goods to friends, business associates or family members before a bankruptcy is initiated — fully intending to buy the property back later once it is safe from being seized to pay their debts. Both of these are examples of fraudulent conveyance, which may cause creditors to take legal action.
Recovering assets for creditors
If a creditor believes there was an act of fraudulent conveyance, the bankruptcy court can retrieve the assets and return them to the creditor. The bankruptcy court has a two-year look-back period to assess a debtor’s property and decide whether the transfer of assets should be canceled or transferred to the creditor.
Fraudulent conveyance is not always done on purpose. Debtors can reach out for legal help to discuss a fraud case.