Asset Protection, Fraudulent Transfers and Bankruptcy

Inevitably, in connection with developing an appropriate strategy for a client who is seeking asset protection planning, the issue of fraudulent transfers is front and center. An experienced Michigan asset protection planning practitioner will be able to quickly identify that certain proposed transfers will indeed violate the Michigan Uniform Fraudulent Transfer Act (“UFTA”).

As to such transfers the practioner should neither advise the client to make a fraudulent transfer nor participate/assist in effectuating the transfer (i.e., do not prepare deeds, bills of sale, etc.).However, what does an asset protection specialist do when a proposed transfer does not appear to violate the UFTA but could ultimately be found to be fraudulent in a court of law.

In such cases, this Michigan asset protection attorney very carefully documents his file with all relevant facts, affidavits and information to support the analysis that the transfer does not constitute a fraud on creditors. But this procedure by itself does not end the attorney’s concerns. The attorney engaging in asset protection planning must also consider the impact of a fraudulent transfer on a subsequent bankruptcy.

Many clients seeking asset protection planning are or may become candidates for a bankruptcy proceeding. Yet a bankruptcy is only going to benefit the client if a discharge is obtained. The Bankruptcy Code, however, denies a discharge if the debtor made a fraudulent transfer within one year before the date of the filing of the petition. Thus, the asset protection planner needs to be cognizant of the severe impact that a fraudulent transfer finding will have on his client in the bankruptcy context. By way of contrast, outside of bankruptcy there is minimal exposure for the transferor and generally the disgorgement of the transferred property by the transferee is the preferred remedy. Essentially the parties are put back in the position they were in prior to the transfer. But in bankruptcy the loss of a discharge is indeed a severe punitive repercussion of a fraudulent transfer.

Despite the bankruptcy law, an asset protection lawyer cannot shy away from advising that certain strategic transfers be made on the remote chance that they can later be determined to be fraudulent. Moreover, it becomes very clear that the timing for the filing of the petition must take into account the one year period affecting discharges and therefore, if transfers have been made as part of the planning process, allow the one year period to run before the client files.