Episode 202 Divorce and Fraudulent Conveyance

Although fraudulent conveyance can have many applications in a variety of situations such as suicide or divorce, we will focus on if a divorce can be a fraudulent conveyance, and if the creditors of one spouse can go after the creditors of a now former spouse after a divorce. While this not necessarily a pleasant topic to discuss, it is something we have seen in my office and does require addressing.

What Is Fraudulent Conveyance or Fraudulent Transfer?

The first step in determining if a divorce can be a fraudulent conveyance is to properly define the term which is also commonly referred to as fraudulent transfer. A fraudulent conveyance or fraudulent transfer can take place when someone who is a debtor owes money because:

  • They have defaulted on a loan
  • They have a judgement against them
  • They obtained money or property through wrongful means

This debtor then owes one or more creditors a specific amount of money because of one or more of the above situations.

What Might a Fraudulent Conveyance or Fraudulent Transfer Look Like?

In general, people that have defaulted on a loan, have a judgement against them, or have wrongfully obtained money or property, will try to hide this fact so that when they eventually file bankruptcy or a creditor tries to collect a debt, the individual will not appear to have anything.

The most common ways these individuals try to hide their assets can include:

  • Hiding assets in Swiss bank accounts (although this does not work as well as it used to)
  • Putting the assets in offshore bank accounts
  • Giving the assets to their parents, wives, children, or grandchildren
  • Burying physical gold in their backyard

What the Law Says About Fraudulent Conveyance in General and Regarding Divorce

In general terms, the law does provide some relief to creditors in the form of fraudulent conveyance or fraudulent transfer through either:

  1. The Uniform Fraudulent Transfer Act
  2. Chapter 5 Bankruptcy Code provisions that give a bankruptcy trustee the power to go after those individuals who have received a conveyance in connection with an effort to defraud a creditor or creditor population

In terms of divorce, one technique a married individual that is being chased by creditors or is trying to proactively hide assets from creditors may use is to get a divorce. In the formal divorce process a formal divorce decree may be issued allowing the individual’s soon to be ex-spouse get an unusually large share of the assets or property of the marital estate.

For the purposes of a trial, it is necessary to prove actual intent that a party gave property or money to a spouse in a divorce for the purposes of fraudulent conveyance. However, if unable to prove actual intent, both the Uniform Fraudulent Transfer Act and the bankruptcy code (which most states including Texas have adopted in one form or another) have provisions that say even if actual intent cannot be established, if the debtor’s actions show the circumstances were such that the individual had knowledge that a judgement was likely going to be rendered to him and there was liability that would lead to a judgement, it could lead also to intent.

If there was indeed a transfer via divorce (a divorce decree is going to transfer property which can prove a transfer) at the time the debtor was insolvent, meaning their debt or potential debt exceeded the value of their assets, or it delayed, hindered, or defrauded any creditor, then the transfer (i.e., the divorce or divorce decree) is subject to a fraudulent transfer action. This means that either a bankruptcy trustee or a creditor of the debtor can go after and seize the assets that were given to the spouse in the divorce, or they can obtain a judgement against the spouse and collect whatever other assets they may have.

When it comes to fraudulent conveyance or fraudulent transfer in a divorce, it is generally not an easy case to make, but under the right circumstances and when working with a reputable and seasoned attorney, it can work, and is a tool that creditors can use to avoid being defrauded. For further questions regarding fraudulent conveyance or transfer, reach out to our office today.

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