Often, when we meet with potential new clients concerning bankruptcy, they focus their questions on their outstanding debts and monthly budget shortfalls. They also frequently ask questions about their current assets as well. However, they often fail to consider assets that they may have had in the recent past but possibly sold or transferred. These transactions are highly relevant when considering filing for bankruptcy. The sale or transfer of an asset prior to filing for bankruptcy may be considered as a fraudulent transfer. Depending upon the time of the transfer, these transactions are required to be disclosed in the Statement of Financial Affairs (SOFA) section of a bankruptcy petition. In addition, the Trustee assigned to the bankruptcy case will most likely ask transfer-related questions for a period that extends back further than SOFA requires.

When a debtor files a Chapter 7 bankruptcy petition, related schedules, and Statement of Financial Affairs with the Bankruptcy Court, they give the court a snapshot of their pre-bankruptcy finances and assets. In a Chapter 7 bankruptcy case, these filings give the Bankruptcy Trustee the information that they need to determine if there are any non-exempt assets or improper transfer of assets that should possibly be available to pay creditors in a bankruptcy case. If the debtor transfers money or property to another person or entity prior to the filing of their petition, this transfer creates a potential asset of the bankruptcy estate. A Bankruptcy Trustee may commence an action within the bankruptcy proceeding called an adversary proceeding to potentially undo the transfer and use the proceeds to pay creditors of the bankruptcy estate. Even if a transfer was made with no intent to defraud creditors, it still may be considered a fraudulent transfer unless the debtor was solvent at the time.

In a bankruptcy proceeding, a Trustee may claw back certain transfers so that the creditors in the case can benefit from money that should have been available to them if the transfer had not taken place. Trustees can void transfers either under the Bankruptcy Code or state law. In New York, the fraudulent transfer statute had, until a few years back, a 6-year lookback period – however, it now has a 4-year period for transfers made after on or after April 4, 2020.

The Uniform Voidable Transactions Act went into effect in New York on April 4, 2020. This is the statute that concerns the fraudulent transfer of assets. The amendment to the statute synchronized the lookback period with the Bankruptcy Code, which has a 4-year statute -however it was not retroactive. Since the new statute only applies to transfers that occurred on or after April 4, 2020, the prior law and case law will continue to apply for another year and a half to come in regarding transfers that took place before the law went into effect.

What transfers of assets are required for a debtor to disclose in the SOFA section of a bankruptcy petition? SOFA requires that the following questions be answered regarding transfers.

SOFA Question #13. Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?

This question seeks to identify when a debtor is possibly improperly transferring assets as “gifts” shortly before filing for bankruptcy. Giving away assets that are potentially nonexempt in a bankruptcy case may be considered a fraudulent transfer. Please note that this question applies to gifts only, and not to support payments that the dependents of the debtor rely on for their basic needs.

SOFA Question #18. Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?

This question requires a debtor to disclose transfers for a 2-year period prior to filing for bankruptcy. If a debtor received no, or inadequate, consideration for such transfers, it may be deemed to be a fraudulent transfer. This includes outright transfers of either money or property. The most common examples of these types of transfers, which are often to a friend, family member, trust, or corporation under the control of the debtor, may include any of the following: transferring money from a bank account, transferring the title of an automobile, or transferring the ownership interest on a deed to a house or other real estate. Remember, the debtor may not consider such transfers as fraudulent and may not have had the intent to defraud their creditors when making the transfer, but the bankruptcy code and N.Y. State Law considers them to be fraudulent transfers, nonetheless.

Beyond SOFA, there is another way that fraudulent transfers of property may be discovered. Shortly after filing a bankruptcy petition, the debtor is required to testify at a 341(a) meeting held by the Bankruptcy Trustee. At the meeting, the Trustee will ask the questions concerning the debtor’s petition and contents and will typically ask transfer-related questions that are broader and have longer time spans than the questions required in SOFA. In addition, a Trustee may also conduct real property title searches online and may request a copy of a credit report which can also potentially help flush out any improper asset transfers.

What are the consequences of a transfer?

There are two major potential consequences of a fraudulent transfer in a bankruptcy case. First, the Trustee may attempt to undo the transfer by suing the recipient of the transferred asset through an adversary proceeding in the Bankruptcy Court. Any proceeds recovered would then be used to pay the creditors in the case. Please note that a Trustee is only likely to pursue a transfer that would result in meaningful benefit to the creditors in the case.

Secondly, in certain circumstances, a transfer can result in the debtor being denied a discharge in their case. See 11 USC § 727(a)(2)(A). The trustee would need to prove either intentional fraud (the transfer was made with actual intent to hinder, delay or defraud a creditor) or constructive fraud (the debtor received less than reasonably equivalent value for the transfer, and the debtor was insolvent on the date of the transfer, or became insolvent as a result of the transfer).

Contact The Law Offices of David I. Pankin, PC

If you have any questions about filing for bankruptcy, or whether a transfer you made may affect your ability to file, please feel free to contact the Law Offices of David I Pankin, P.C. at (888) 529-9600 or by using our easy online contact form. We always provide a free consultation to review all your bankruptcy options.

Additional Information

NY Uniform Voidable Transactions Act:

https://www.nysenate.gov/legislation/laws/DCD/A10

Statement of Financial Affairs Form: https://www.uscourts.gov/sites/default/files/form_b_107.pdf