U.S. Bankruptcy courts operate for the purpose of providing relief to people who lack the financial resources to satisfy the overwhelming debts they incurred. The bankruptcy process also serves to help minimize the monetary losses the debtor’s creditors may suffer due to their insolvency.
Despite the relief that bankruptcy offers, some people still try to game the system by taking advantage of the tools that the bankruptcy process provides. However, those who try to reap the benefits of bankruptcy beyond what the law provides can face significant legal repercussions for their selfish actions.
Forms of Relief Under Bankruptcy Law
When someone files a bankruptcy petition under federal law, they are entitled to important forms of relief. First, bankruptcy petitioners are protected from legal action initiated by their creditors throughout bankruptcy proceedings under what is known as the “automatic stay” in bankruptcy. During the automatic stay period, people cannot file a lawsuit against the bankruptcy petitioner for claims involving the collection of money under a promise to repay.
The automatic stay in bankruptcy provides comprehensive protection against legal actions such as breach of contract suits, eviction cases, and foreclosure proceedings. The automatic stay is available to debtors in both Chapter 7 “liquidation” cases and Chapter 13 “reorganization” proceedings.
One of the most critical forms of relief in bankruptcy involves the absolution of the petitioner’s debts upon the conclusion of proceedings. Although bankruptcy relief is primarily concerned with helping the petitioner repay as much debt as their assets allow without incurring substantial financial hardship, many of the petitioner’s obligations will be wiped out upon the conclusion of their case.
Known as the “discharge in bankruptcy,” the petitioner is no longer legally responsible for repaying certain debts. The discharge in bankruptcy relieves the petitioner of their obligation to repay many of their debts, even if the creditor hasn’t received a single penny toward repayment.
Fraudulent Transfers in Bankruptcy
Even though bankruptcy has the potential to turn around the petitioner’s luck, sometimes they can get greedy and engage in fraudulent transfers. A fraudulent transfer occurs when the petitioner sells or otherwise transfers ownership to their property with the intention of decreasing the amount their creditors ultimately receive from the bankruptcy proceedings.
Examples of fraudulent transfers include:
- Omitting transactions from required disclosures
- Transferring ownership of assets to a close relative or friend
- Selling assets for less than their fair market value
- Transferring assets to another person while retaining them for personal use
- Transferring assets and becoming insolvent shortly thereafter
- Making a transfer to defraud creditors
A bankruptcy trustee is someone appointed by the court to manage a bankruptcy petitioner’s assets during bankruptcy proceedings. Importantly, bankruptcy trustees have the authority to undo fraudulent transfers by reversing the transaction in question.
To illustrate the idea behind this, imagine that the petitioner sells a boat to their brother-in-law in a desperate attempt to raise cash. Although the petitioner knows that the boat can ordinarily sell for $7,000 on the second-hand market, they nevertheless accept $3,000 from their brother-in-law. Less than a year after the transfer, the petitioner files for bankruptcy.
Although the petitioner may not have intended to make a fraudulent transfer, the boat sale may still qualify as one because the petitioner sold it for less than its fair market value. Consequently, the bankruptcy trustee can petition the court to unwind the transaction.
The trustee in a Chapter 7 bankruptcy can recover the boat and liquidate it to repay priority creditors. The trustee in a Chapter 13 bankruptcy can add the appropriate value of the boat to the amount the petitioner must repay their creditors under their Chapter 13 repayment plan.
If the petitioner performs a transaction with the intent to defraud their creditors, they may face federal criminal charges for bankruptcy fraud—a white-collar crime.
Consult The Virga Law Firm, P.A. for Legal Representation Today
If you have questions regarding a legal matter related to bankruptcy, you should seek the legal advice of an experienced attorney from The Virga Law Firm, P.A. Our legal team has years of valuable experience handling legal matters involving bankruptcy law and procedures. We hold your legal rights in the highest regard and will work tenaciously to preserve your best interests.
Call The Virga Law Firm, P.A. at (800) 822-5170 or contact our office online to schedule a case evaluation exploring your available legal options today.