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Roger, Attorney
Category: Bankruptcy Law
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Larry Watkins and his wife, Deidre, enjoyed a luxurious lifestyle

Resolved Question:

Larry Watkins and his wife, Deidre, enjoyed a luxurious lifestyle while his financial consulting business flourished. When the business failed, Larry was personally faced with debts of $7 million. On the eve of the bankruptcy filing, Deidre suddenly announced that she wanted a divorce. During the amicable divorce proceeding, Larry willingly transferred all of his assets to Deidre. Larry and Deidre managed to obtain their divorce in only two months, a virtually unheard of feat. Larry’s creditors sought to have the transferred assets returned to the bankruptcy estate as either a voidable preference or a fraudulent transfer. Can the transfer be set aside on either ground asserted? What difference does the classification of the transfer make from a legal standpoint?
Submitted: 6 years ago.
Category: Bankruptcy Law
Expert:  Roger replied 6 years ago.

Both could be used to reverse the transactions and put the assets back into Larry's bankrupt estate.


A voidable transfer occurs when the debtor transfers assets in favor of one creditor at the expense of other secured creditors. If the transfer was made in the 90 days prior to filing the petition, or was made in anticipation of a bankruptcy filing, the bankruptcy trustee may set aside the preference.


It could be argued that Deidre is a creditor of Larry.


The trustee is given the power to set aside or "avoid" certain transfers of the debtor's assets out of the estate that unfairly place assets beyond the creditor's reach. Such a transfer of the debtor's assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims, is called a "fraudulent conveyance".


There are two types of fraudulent transfers in bankruptcy law. The first, actual fraud, involves the intent to defraud creditors, the other, sometimes called constructive fraud, involves a transfer, which is made in exchange for grossly inadequate consideration.

Actual fraud is committed when 1) a transfer is made within one year before the date of the filing of a bankruptcy petition and 2) is made with the intent to hinder or defraud a creditor. Actual fraud requires proof of intent from the person challenging the transfer. Of course, a debtor intending to defraud his creditors will not be overt about his intentions to do so. Therefore, courts have set forth circumstances, the existence of which indicate the intent to defraud. Some examples of these circumstances are actual or threatened litigation against the debtor, a retention of possession or control of the property, transfer of substantially all the debtor's assets, transfer to a newly created corporation, and a special relationship with the person to whom the property is transferred. These are only factors to be considered in determining whether a person intended to defraud a creditor, and whether they do in fact prove the debtor's fraudulent intent is to be determined on a case by case basis.


Constructive fraud also requires 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. In this case, intent need not be proven rather the focus of the inquiry rests on whether the debtor received reasonably equivalent value. Of course, reasonably equivalent value can be in the eye of the beholder. When there is nothing of value exchanged for the transfer of the debtor's property, the answer is an easy one. Not infrequently, however, something of value is given and the question becomes whether the value was really adequate compensation for the property.


The timing of the transfer is important in determining whether the transfer will stand or not. Only those transfers completed or "perfected" within a year of the filing of the petition for bankruptcy may be reversed. The transfer of certain types of property requires more than one step to complete the transaction. In the case of real estate, for example, the transfer is not complete until a deed is officially recorded.


Either process could result in the property being taken from Deidre and tendered to the bankruptcy trustee.

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