When one faces creditors making threatening phone calls, letters from collection agencies, civil judgment from creditors, wage garnishments, repossessions, you can feel like you are under attack. As a result, many people make the mistake and begin transferring assets to loved ones to put them beyond the reach of creditors and then file for bankruptcy. Under 11 USC §548 of the Bankruptcy Code, a trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within two years before the date of filing of the petition.
There are two types of fraudulent transfers in bankruptcy. First, is actual fraud, involving the intent to defraud creditors. Actual fraud requires proof of intent from the person challenging the transfer. Second, sometimes called constructive fraud, involves two conditions: 1) in exchange for the transfer, the debtor received less than “reasonably equivalent value,” and 2) the debtor is unable to pay debts either at the time the transfer was made or as a result of the transfer itself.
When it comes to determining reasonably equivalent value there is no formula. Courts will look at all the circumstances surrounding a transaction to determine whether the exchange looks even. The Court will look at whether the sale was for fair market value, or whether it was made in good faith in the ordinary course of business.
Once a transfer has been deemed fraudulent, the trustee may recover the property, or the value of the property, and make it part of the bankruptcy estate. The one exception to this rule, is in the case of the “bona fide purchaser.” A bona fide purchaser is one who acted in good faith to purchase the property without notice of the outstanding rights of others to the property. Here, the person receiving the property will be allowed to retain the property or regain the value they paid for it.
In regards to asset protection, investing in a homestead is a great way to protect assets. Arizona has a generous homestead exemption in place that allows homeowners up to $150,000 of equity in their home. Further, consider increasing your insurance coverage, or investing in qualified retirement plans that are tax exempt. However, before using any of these potential methods, you need to contact a qualified Arizona Bankruptcy Attorney.