Legal Solutions

Understanding fraudulent conveyances

On Behalf of | Apr 8, 2021 | Business Law

Texas is home to many aspiring entrepreneurs, but not all of them succeed. Some run into financial difficulty because their business plan was faulty, others experience unexpected market setbacks, and others may be the victims of bad luck. Bankruptcy is a common solution to such misfortunes, but a number of failing businesses make a fatal mistake by attempting to pay some debts and not others. Under certain circumstances, a conveyance within two years of filing of the bankruptcy petition can be regarded as fraudulent and can be set aside by the trustee or a creditor.

Explaining a fraudulent transfer

Businesses commonly incur debts to acquire inventory or assets. When the amount of debt becomes unmanageable, the business more likely than not consider filing a Chapter 11 bankruptcy petition. Some debtors attempt to reduce their obligations by paying some of their creditors shortly before filing the bankruptcy petition. Because the debtor is insolvent, such payments are often regarded as “fraudulent.” Even if the debtor did not actually intend to commit fraud, the payments to some creditors and not to others are treated as fraudulent because the creditors who received payments from the debtor were treated differently from creditors who received lesser or no payments.

What happens to fraudulent transfers?

The consequences of a fraudulent transfer depend upon the circumstances. In some cases, the payment can be recaptured by the bankruptcy trustee. In other cases, a creditor who was entitled to payment from the debtor can recover all or a portion of its debt from the party who received payment from the debtor. In any event, the debtor’s attempt to retire or reduce a debt is frustrated. If the trustee is successful in attacking the transfer, the recovered asset becomes part of the bankrupt estate and is used to pay claims.

A business that receives an offer of payment from a debtor who appears to be on the brink of bankruptcy should carefully scrutinize the offer. In many cases, the potential for a voidable transfer is very high. In those cases, the creditor may wish to consult an experienced business law attorney for advice on whether the conveyance can be successfully attacked as fraudulent.