When a person files bankruptcy, most of their property and cash is placed into an estate that's used to pay creditors. People who received assets from debtors in up to four years prior to filing for bankruptcy may receive demands from trustees to turn over those assets. Here's how this can happen and what you can do to defend yourself.
As noted previously, all non-exempt assets a debtor owns are used to pay the person's creditors. Knowing this, some debtors will transfer assets to other people to prevent them from being seized by the bankruptcy trustee. Once the bankruptcy proceeding ends, the receivers transfer ownership of the assets back to the debtors. This is a fraudulent transaction, one that can get all parties involved into legal trouble.
However, not all fraudulent transfers are intentional. Sometimes debtors sell or give away assets for a variety of non-fraudulent reasons, including satisfying debts. If the transfer contains certain characteristics, though, it may be flagged as fraudulent by the bankruptcy trustee.
In either case, trustees will move to void the transfers and require receivers to hand over the assets. This can pose a burden on the receiver, depending on the circumstances. For instance, if the person was given cash, he or she may not have the money any more. This may lead to other consequences, such as court judgments and even jail time.
For Value and In Good Faith
Luckily, the bankruptcy code provides an affirmative defense receivers can use to avoid being held liable for the actions of debtors. If you can show you obtained the asset for value and in good faith, then you may not be required to return it to the trustee and may avoid the associated consequences if you don't have the asset any longer.
Of these two elements, "for value" is probably the easiest to prove. This simply means you received the asset for or close to its estimated value. For instance, the trustee may not think anything about someone purchasing a $5,000 vehicle for $4,500, but may raise his or her eyebrows at someone buying the same vehicle for $500 because it may indicate the debtor was trying to hide a fraudulent transfer by making it look legitimate. To prove you received the asset at fair value, you'll need to provide information about the asset's worth and a receipt for the amount you paid.
Showing good faith can be a little more challenging, because the court doesn't provide a framework for determining what is considered good faith. The basic gist of this element is you must show you didn't know or couldn't have known the debtor was engaging in fraud when he or she was transferring the asset to you. The court typically bases its assessment on whether there were red flags evident in the transaction that would've indicated an issue. For instance, if the debtor states he or she will be filing bankruptcy in the near future while selling the asset, the court may point to that as a red flag.
If you receive a notice from the bankruptcy court about an asset you received, it's best to contact an attorney for assistance with determining the best way to respond. Click here to check it out.