Fraudulent Transfers: What Every Creditor Should Know

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In the face of mounting debt, some debtors will resort to transferring ownership of their property to a family member or close friend in order to keep the property out of the hands of their creditors.  It is not uncommon for boats, cars, and financial assets to be transferred once a judgment has been obtained against a debtor or the threat of a judgment is imminent.    When this occurs, the creditor’s first question is typically whether there is any way that they can use property in someone else’s name to satisfy the obligation owed to them by the debtor.  North Carolina has adopted the Uniform Fraudulent Transfer Act that, in certain circumstances, allows creditors to reach these transferred assets in order to secure payment for the obligations owed to the creditor.    

Elements of a Fraudulent Transfer A transfer is “fraudulent” as to a creditor if the debtor made the transfer (1) with the intent to hinder, delay, or defraud any creditor of the debtor, or (2) without receiving a reasonably equivalent value in exchange for the transfer, and the debtor either, (a) was engaged or about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (b) intended to incur, or believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.   

In cases in which intent is an element, it can be one of the most difficult to prove.  However, in determining whether a transfer was fraudulent under the Act, consideration may be given to the following nonexclusive list of factors:

1.  The transfer was made to an “insider,” such as a relative, business partner, or entity in which the debtor exercises control;      

2.  The debtor retained possession or control of the property following the transfer;  

3.  The filing of or threat of a lawsuit occurring prior to the transfer;

4.  The transfer occurred shortly before or after a substantial debt was incurred;

5.  The value received for the transfer in comparison to the value of the property transferred;

6.  The debtor was insolvent at the time of the transfer or became insolvent shortly after the transfer was made.  

For this purpose, insolvency is simply the debtor’s debts exceeding a fair valuation of the debtor’s assets.   

If the court determines that a fraudulent transfer has occurred, there are several remedies available to the creditor.  The court may “reverse” the transfer so that the creditor can utilize the asset to satisfy its claim, or the court could order the property be seized and liquidated in order to satisfy the creditor’s claim.  Finally, the court is given broad authority to provide “any other relief that the circumstances may require.”   

Although there are some exceptions, lawsuits claiming that a transfer was fraudulent must be brought within four years of the transfer being made.  The best defense a transferee of property can make to these causes of action is that the value given to the transferor in exchange for the property was a “reasonably equivalent value.”  It would be a question of fact as to whether the required value was received in exchange for the transfer.   

In summary, it is certainly possible for a creditor to reach a debtor’s transferred assets under certain circumstances.  Our office is available for any questions regarding these types of transfers and how they can affect your ability to collect payment from your debtors.

 

 

Fraudulent Transfers

In the face of mounting debt, some debtors will resort to transferring ownership of their property to a family member or close friend in order to keep the property out of the hands of their creditors. It is not uncommon for boats, cars, and financial assets to be transferred once a judgment has been obtained against a debtor or the threat of a judgment is imminent.

When this occurs, the creditor’s first question is typically whether there is any way that they can use property in someone else’s name to satisfy the obligation owed to them by the debtor.

North Carolina has adopted the Uniform Fraudulent Transfer Act that, in certain circumstances, allows creditors to reach these transferred assets in order to secure payment for the obligations owed to the creditor.

Elements of a Fraudulent Transfer
A transfer is “fraudulent” as to a creditor if the debtor made the transfer (1) with the intent to hinder, delay, or defraud any creditor of the debtor, or (2) without receiving a reasonably equivalent value in exchange for the transfer, and the debtor either (a) was engaged or about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction or (b) intended to incur, or believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

In cases in which intent is an element, it can be one of the most difficult to prove. However, in determining whether a transfer was fraudulent under the Act, consideration may be given to the following non-exclusive list of factors:
1. The transfer was made to an “insider,” such as a relative, business partner, or entity in which the debtor exercises control;
2. The debtor retained possession or control of the property following the transfer;
3. The filing of or threat of a lawsuit occurring prior to the transfer;
4. The transfer occurred shortly before or after a substantial debt was incurred;
5. The value received for the transfer in comparison to the value of the property transferred.
6. The debtor was insolvent at the time of the transfer or became insolvent shortly after the transfer was made. For this purpose, insolvency is simply the debtor’s debts exceeding a fair valuation of the debtor’s assets.

Remedies
If the court determines that a fraudulent transfer has occurred, there are several remedies available to the creditor. The court may “reverse” the transfer so that the creditor can utilize the asset to satisfy its claim, or the court could order the property be seized and liquidated in order to satisfy the creditor’s claim. Finally, the court is given broad authority to provide “any other relief that the circumstances may require.”

Deadline for Filing/Defenses
Although there are some exceptions, lawsuits claiming that a transfer was fraudulent must be brought within four years of the transfer being made.

The best defense a transferee of property can make to these causes of action is that the value given to the transferor in exchange for the property was a “reasonably equivalent value.” It would be a question of fact as to whether the required value was received in exchange for the transfer.

In summary, it is certainly possible for a creditor to reach a debtor’s transferred assets under certain circumstances. Our office is available for any questions regarding these types of transfers and how they can affect your ability to collect payment from your debtors.

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Brad Piner concentrates his law practice on creditors’ rights, including creditor collections, consumer and commercial foreclosures, construction liens and bond claims.

Basics of Medicaid Planning

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Medicaid is a federal and state program that provides health insurance coverage to low income children, seniors, and persons with disabilities. It also covers nursing home care for those individuals who meet certain income and resource eligibility requirements, which is typically referred to as “Adult Medicaid.” This article will focus on Adult Medicaid coverage for both skilled and intermediate levels of nursing home care and planning steps that can be taken to qualify for coverage under the Medicaid program. Adult Medicaid does not cover rest home or assisted living care for indigent seniors or those with disabilities. However, this level of care is covered by the “Special Assistance” program in North Carolina which is similar to Adult Medicaid but has different eligibility requirements.

In North Carolina, Adult Medicaid is administered by the Division of Medical Assistance of the Department of Health and Human Services (“DMA”). Throughout the state, the county Departments of Social Services (“DSS”) assist DMA with local program management.

DSS is tasked with reviewing Adult Medicaid applications and determining that eligibility requirements have been satisfied. In order to qualify for Adult Medicaid benefits, the individual must first medically require intermediate or skilled nursing home care and be a resident of an appropriate facility providing such care. Next, the individual may have no more than $2,000 in “countable” assets if single or $3,000 for a married couple where both are in a nursing home facility. Finally, the individual’s maximum allowable income is tied to the Medicaid reimbursement rate for the facility at which the individual resides. The individual’s net monthly income must be paid to the nursing home, with the Adult Medicaid benefits covering any deficiency. Some relief is provided from the income eligibility requirements in order to provide for the individual’s non-institutionalized spouse.

“Countable” assets for this purpose generally include all property except the following: (1) prepaid burial contract, (2) a personal residence, (3) income-producing property, (4) tenancy in-common interest in real property, (5) term life insurance, (6) one motor vehicle, and (6) personal possessions such as clothing, furniture, and jewelry. This is a general non-exclusive list, and there are limitations and exceptions that may need to be considered in any individual case.

Some individuals will attempt to impoverish themselves in order to meet the Adult Medicaid eligibility requirements by making transfers of assets to family members. Some transfers are permitted under the Adult Medicaid rules; however, the rules can be complex and discourage transfers of assets for less than their fair market value. If the transfers do not comply with the rules, benefits eligibility can be denied. Currently, DSS will review all transfers made during the 5-year period beginning when the applicant is institutionalized and has applied for Adult Medicaid. Any uncompensated transfers or transfers not otherwise complying with the rules will result in a sanction period during which benefits will not be paid. The sanction period is for a specified number of months and is calculated by dividing the total of all amounts transferred during the look-back period by $6,300.

Medicaid planning is a complex matter with many regulations and potential planning opportunities available. If you have any specific questions about your personal planning situation, please contact our office so that we can discuss planning for your particular situation.