Fraudulent Conveyances

What is a fraudulent conveyance?

The most important issue in any asset protection plan is whether or not the transactions constitute fraudulent transfers or fraudulent conversions (collectively, “fraudulent conveyance”) pursuant  to Florida Statutes. A fraudulent transfer is a debtor’s transfer of legal title to his real or personal property to a third party with the intent to hinder, delay or defraud a present or future creditor. A fraudulent conversion is a debtor’s conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which new property is exempt or immune from creditor attack. Florida Statues provide that a creditor can sue to overturn a transfer or conversion up to four years after a conveyance was made or obligation incurred. Asset protection planning and transfers become immune from fraudulent conveyance suspicion four years after the planning takes place. Fraudulent transfer laws are different in bankruptcy court because there are different rules under federal bankruptcy laws.

What is the consequence of making a fraudulent conveyance?

Fraudulent Conveyances are not prohibited by law and are not illegal.  Florida Statutes do not provide for additional damages against debtors and do not impose criminal fines or penalties.  However, Florida Statutes do provide courts limited equitable remedies to undo fraudulent transfers. Fraudulent transfers may be undone and reversed by a court’s putting the property back in the debtor’s hands where the property becomes subject to the creditor collection process. The Statutes provide several equitable remedies to assist the creditor’s collection of these converted assets including injunctions against further transfers, imposing a receivership on the assets, or imposition of a constructive trust. A creditor alleging fraudulent conveyance may sue not only the debtor transferor but also the transferee who received the property in order to undo the transfer. Consequently, a fraudulent transfer to a friend or family member may make that friend or family member a defendant in a creditor’s fraudulent transfer lawsuit. Fraudulent transfers have more serious consequences if you file bankruptcy. A fraudulent transfer or conversion within two years of bankruptcy could cause you to lose your bankruptcy discharge.

What makes a conveyance a fraud against creditors?

Not all transfers or conversions which move assets beyond a creditor’s reach are fraudulent and subject to reversal. Just because you have debt or potential liability in your life does not mean you cannot transfer or sell your property, or that you must refrain from prudent tax planning and financial planning. Whether or not a particular transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor’s primary purpose and his intent behind the transfer or conversion. To ascertain the debtor’s purpose and intent of a property transfer courts look to factors indirectly indicate intent to avoid creditor claims. Key examples which may determine that a transfer was fraudulent and should be reversed would be whether any particular transfer was made to a debtor’s family member; whether a transfer was concealed; whether the debtor retained effective use or control over the property transferred; and, whether the transfer rendered the debtor insolvent.

Defenses against fraudulent conveyance allegations.

When a creditor is trying to collect money from a debtor who has previously engaged in asset protection planning and has little or no assets easily subject to creditor collections a creditor will almost always institute an action attacking one or more of the debtor’s prior transfers as fraudulent transfers or conversions. Just because a creditor believes a conveyance was intended to defraud creditors does not mean a court will set aside the conveyance. A debtor can show many legitimate reasons to convey assets other than avoiding creditors. As stated above, legitimate financial planning or estate planning often rebuts fraudulent transfer allegations. Reasonable financial planning is not reversible as a fraudulent transfer simply because one of the consequences of reasonable planning is increased asset protection.

Your stated defense against fraudulent transfer allegations must be credible. For example, some people explain their formation of family partnerships and  trusts as reasonable estate tax planning. That reason is not credible if the debtor does not have a taxable estate that warrants estate tax planning.

How fraudulent conveyance issues impact asset protection planning?

Just the possibility of a creditor’s allegations of fraudulent conveyance should not deter aggressive asset protection planning prior to time a judgment is entered by a court. People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property. This is why the applicable statutes do not prohibit or make illegal fraudulent conveyances. Because a court cannot increase the amount of the judgment damages already awarded against a debtor because of a debtor’s fraudulent conveyance, asset protection is valuable even if steps taken might be subsequently challenged or even reversed.

Will a Trustee take my car or other personal possessions in a Chapter 7 bankruptcy?

A common question that I receive when a client files a bankruptcy is whether the Trustee is going to take the debtor’s car and sell it for the benefit of creditors.  In Florida, only $1,000.00 of equity is exempt from creditors.  Many times cars are upside down, so there is no need for this analysis.  However, many times a car is fully owned by the debtor and is worth several thousand dollars.  Even in this case, a trustee will usually not have a sheriff levy the car.  The reason is there are a lot of costs that go into taking, holding and selling a car.  First a Trustee will have to pay a Sheriff to levy the car, will then have to pay storage costs to store the vehicle, then will have to pay advertising costs to properly advertise the car pursuant to Florida Statutes, and then will have to pay an auctioneer to sell the car.  Additionally, this will be a fire sale and the car will  most likely only sell for a portion of the price that it is actually worth.  Of course, the sheriff, the auctioneer, the storage company and the advertising company will all be paid before any distribution can be made to the creditors.  Additionally, the debtor will receive the first $1,000.00 of any sale.  Therefore even if a car is “worth” $9,000.00 according to Kelly Blue Book, it is doubtful that the trustee will order the sale of the car as the costs clearly outweigh the benefits.  Usually, a debtor will be able to work out a deal with the Trustee in situations where cars have considerably more than a $1000.00 in equity.  This analysis can also be used for other personal positions within a debtor’s home. 

Short Sales Offer Few Advantages to Borrowers

I rarely advise a client to participate in a “short sale” of their upside down residence. The only times that I recommend a short sale is if the lender is willing to waive the entire deficiency or agree to a promissory note that is considerably less than the deficiency judgment would be.  However, may times a lender will not agree to waive the deficiency and the lender or a third party could come after the borrower years down the road.  Because lenders rarely agree to waive a deficiency, there are little if any legal advantage for a homeowner. The only possible “advantage would be the peace of mind of not having to deal with the ownership of an upside down property anymore.  On the other hand the big winners are the lender and the real estate agents.  The lender benefits by having the homeowner market the house and usually procuring much higher sale proceeds compared to the lender’s own fire sale. The real estate broker benefits by gaining a guaranteed commission of usually 3 percent of the sale. The buyer also benefits by acquiring a house at a low price. But, where’s the benefit to the homeowner? The lender almost never releases the homeowner from personal liability so the chances of a lawsuit seeking a deficiency judgment still lingers after the short sale just as it does after foreclosure. Therefore, if anything there is only a false sense of security for the  homeowner.  In reality a homeowner could be served with a deficiency motion within the next five years by the Bank or an entirely new third party.

Another  common reason people give for their insistence in pursuing a short sale before letting a home go to foreclosure is “credit.” Many people insist that foreclosure has a worse effect on the borrower’s credit score, and they assume their credit will recover quicker if they provide the mortgage lender with a buyer in a short sale arrangement. However, there really is no science or method to determining how credit scores work and are affected.

For example,  on Saturday, November 27, 2010, the Wall Street Journal’s, Nick Timiraoas, wrote an article about short sales and credit. He posed the question, “Is a short sale as damaging to a borrower’s credit as foreclosure.” His answer was, “Generally speaking, yes.”  He explained that in either a foreclosure or a short sale a borrower’s credit score will fall by about 100 points according to Fair Isaac Corp.  So, your credit will get hit the same whether you make the effort to short sale your property or simply walk away.

Banks do not even want Ownership of some properties

Many times Banks go through the entire foreclosure process only to cancel the sale of the property the day before the public auction.  Many banks do this because they do not want to pay for the carrying costs of property ownership such as past taxes, maintenance, home association dues and maintenance fees.  In this scenario, the borrower can remain in the residence rent free until the Bank moves the Court for the Sale of the Property.  This could be months or years later when the Banks feel that the market is better to sell the property.

Additionally, many banks will offer the borrower favorable lease terms after the Sale of the property to the Bank.

Banks offering thousands of dollars to former owners now “tenants” just to peacefully leave their former residences

Even after the foreclosure process and after the Court issues a new Certificate of Ownership to the Bank, Banks are still willing to negotiate with former homeowners.  Banks have offered former homeowners thousands of dollars, labeled as “relocation assistance payment”, simply to leave their residences in  broom clean condition and agree not to fight anymore of the foreclosure process.  Borrowers are allowed to use this money in any way they see fit. 

Life After Bankruptcy

A middle to upper class family hired me for bankruptcy almost a year ago.  At the time they were close to $75,000 in credit card debt and had a promissory note of $60,000 that they signed pursuant to a short sale that occurred on their previous residence.  Moreover, the husband and wife just had a baby.  The family though lived in a relatively nice community and they desired to keep their new home.  The family made close to $75,000 a year but was able to still qualify for a Chapter 7 bankruptcy through the new Means Test.  The family was discharged from Bankruptcy and the Trustee determined that they had no assets to liquidate to creditors.  Therefore, the family was able to extinguish well over $100,000 in debt, keep their home and go forward with a clean slate.

Several months later, the husband was able to start a new business without the hindrance of a sever unsecured debt.  I also just learned that the family has another child on the way.

Strategic Defaults and Life after Foreclosure

I have advised many people, based on today’s market, to walk away from their homes or other investment properties otherwise called “Strategic defaults”.  However, many clients are reluctant because they feel it may have major affects on their professional lives or their credit.  However, I believe the advantages of walking away from an upside down house far outweigh the negative consequences.  First, a typical foreclosure process takes years and during this process a borrower is not required to pay his mortgage.  Therefore, a borrower can use this money that they are not paying their Bank to pay off other debts, invest in a business opportunity, place toward retirement, or use as rent to find another place to live.  Recently, I received a phone call from a client who hired me over 18 months ago to help him with a foreclosure. This client decided to stop paying his mortgage. After a long fight, he did lose his home to foreclosure. Several months after the foreclosure the client told me that his life can best be described as “business as usual.”

He recently was hired with a new company making more money than he was before. The job application asked him about prior foreclosures, and he answered truthfully. The foreclosure was not an issue during his job interview for his new job, nor had any other prospective employer raised the issue during his job search. He said that people with foreclosure on their credit report were no longer seen as fiscally irresponsible as it is  relatively common in these days especially in South Florida.

This client has also been receiving credit card solicitations and  recently purchased a car and got a car loan. He wasn’t able to get the best interest rate but he was able to get a decent interest rate.   He was able to qualify a new car loan only a few months after his foreclosure. Overall, the client stated that the stigma of foreclosure  was much less than he expected.