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What is a Fraudulent Conveyance?

Charity Delich
Charity Delich

A fraudulent conveyance occurs when someone transfers property with the intent of defrauding another person or with the intent of hindering, delaying, or avoiding a debt or legal duty. Primarily, it surfaces when a debtor is attempting to preclude a creditor from accessing the debtor’s assets. In this case, the debtor may transfer his or her assets to a third party in order to prevent the creditor from using those assets to satisfy outstanding claims. The transfer is typically made in name only, meaning the debtor doesn’t intend to actually relinquish ownership of the asset.

A fraudulent conveyance can occur with respect to virtually any type of asset that can be used in satisfaction of a creditor’s claim. For instance, someone who transfers a house or car to a third party to avoid paying a creditor may be charged with a fraudulent conveyance. In many jurisdictions, however, creditors cannot reach a debtor’s personal assets, such as furniture, dishes, or clothing.

Woman holding a book
Woman holding a book

Typically, a creditor has legal recourse if he or she can prove that a debtor committed a fraudulent transfer. As a general rule, in order to win a fraudulent conveyance suit against a debtor, the creditor must prove three elements. First, the creditor ordinarily needs to demonstrate that he or she is in fact entitled to claim the assets. In other words, the debtor must have owed the creditor a legitimate debt at the time that the debtor transferred an asset to a third party.

Secondly, the creditor usually needs to show that the debtor actually made a transfer of property to a third party. Finally, the creditor must prove that the debtor intended to defraud the creditor in making the transfer. This can be inferred by the circumstances surrounding the transfer. For instance, transferring assets at significantly less than the fair cash value of the assets may show the intent to make the assets unavailable to a creditor. Other factors a judge or jury may weigh in determining intent is whether the transfer was made to a debtor’s relative, whether the debtor effectively maintained control over the asset, whether the transfer was hidden, and whether the debtor became insolvent as a result of the transfer.

If a creditor is able to prove all of these elements, a judge or jury will likely find that a fraudulent conveyance has occurred. The conveyance is then normally declared void. This effectively allows the creditor to pursue collection of the asset in order to satisfy his or her claims against the debtor.

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