Desperate times call for desperate measures, or so the saying goes. When you find yourself low on cash and beset by debt collectors, it can be tempting to try to protect whatever property you do have by transferring it to someone else.
But you should resist that temptation. Both California law and the U.S. Bankruptcy Code have provisions that let creditors undo such transfers. And under California law, making a fraudulent conveyance is a crime.
Article at a Glance
- California’s Uniform Voidable Transactions Act lets creditors avoid transfers of property by insolvent debtors in certain circumstances.
- The Bankruptcy Code has a similar provision, and you might even be denied a discharge if the transfer was within a year before you file for bankruptcy.
- In California, you might even be committing a crime when you transfer property intending to make it harder for a creditor to collect.
The Voidable Transactions Act
In 2015, California enacted the Uniform Voidable Transactions Act (or UVTA). The UVTA replaced a similar law called the Uniform Fraudulent Transfer Act. Under the UVTA, a creditor can void a transaction between a debtor and another party if the debtor:
- Did not receive a reasonably equivalent value in exchange for the transfer; and
- The debtor was insolvent (his or her debts exceeded his or her assets) at the time of the transfer or became insolvent because of it.
A transfer can even be undone by a subsequent creditor if the transfer was made with the actual intent to hinder, delay, or defraud (and in certain other circumstances). In general, creditors have four years from the date of a transfer to undo it under the UVTA. If they don’t discover it until more than four years later, they still have one year to undo it, so long as no more than seven years have passed.
In other words, if you have more debt than assets and give away your property, your creditors can go to the person you gave the property to and demand it back—even if the transfer was as much as seven years ago. So, in California, giving away your property is not a good strategy for protecting it against creditors.
But note that the UVTA does not let a creditor undo a transaction in which you received “reasonably equivalent value.” In other words, you are still allowed to sell your property so long as you receive an adequate price for it.
Voidable Transfers in Bankruptcy
If you choose to file for bankruptcy, the UVTA isn’t the only problem that can arise when if you transfer property without adequate compensation. The U.S. Bankruptcy Code contains a provision similar to the UVTA for what it calls “fraudulent transfers.” A fraudulent transfer under the Bankruptcy Code is one in which the debtor:
- Intended to hinder, delay, or defraud a creditor or subsequent creditor;
- Received less than a reasonably equivalent value in exchange for it;
- Was insolvent or became insolvent as a result of the transfer (or in certain other circumstances).
Like creditors under the UVTA, the bankruptcy trustee can avoid such transfers and take back the property from whomever you gave it to. But the trustee’s power is limited to fraudulent transfers within the last two years.
But that’s not all: making a fraudulent transfer within one year before filing for bankruptcy is one reason why a bankruptcy discharge can be denied in California. That is, if you make a fraudulent transfer during the year before you file your bankruptcy petition, the court might refuse to discharge your debts—defeating the whole purpose of going through bankruptcy.
The Crime of Fraudulent Conveyance
And then we come to an even bigger potential problem: In California, it is a crime to fraudulently sell, convey, assign, or conceal property with the intent to defraud, hinder, or delay a creditor of its rights, claims, or demands. The crime of fraudulent conveyance is a misdemeanor, punishable by a $1,000 fine or up to one year in jail or both.
If the property is stock in trade—i.e., inventory in a business—with a value of greater than $250, then the crime is a felony, meaning you could be sent to jail for more than one year.
The Right Way to Protect Your Property Against Creditors
All that said, it is possible to protect your property against your creditors—through bankruptcy. After you go through a Chapter 7 or Chapter 13 bankruptcy, you will receive a discharge. The discharge legally excuses you from your remaining unsecured debts. And, although in a Chapter 7 bankruptcy the trustee is supposed to sell your assets to pay off your creditors, most debtors can fully protect their property through California’s generous bankruptcy exemptions.
Borowitz & Clark is a leading consumer bankruptcy law firm serving the Los Angeles area and all of Southern California. We help Californians just like you negotiate debt or file for bankruptcy to get a fresh start financially. If you’re struggling to pay off your debt and would like to investigate legal ways to protect your property, contact us for a free consultation.