Constructive fraudulent transfers
Under 11 U.S.C. § 548(a)(1)(B), the trustee can void any transfer where the debtor received "less than a reasonably equivalent value" while insolvent. Unlike actual fraud, this does not require proof of intent. The transaction itself is enough.
Selling your car worth $15,000 to a friend for $5,000 is a textbook constructive fraudulent transfer. The trustee can void the sale, recover the car (or its value), and use it to pay creditors.
11 U.S.C. § 548(a)(1)(B): A transfer is avoidable if the debtor received less than reasonably equivalent value in exchange and was insolvent at the time of the transfer (or became insolvent as a result).
What counts as less than reasonably equivalent value?
Courts generally look at the fair market value of the property at the time of the transfer. If the sale price is significantly below market value -- typically less than 70-75% of fair value -- it is likely to be challenged. Factors include:
- Was the price arm's-length (negotiated between unrelated parties)?
- Was the property marketed or advertised?
- Was the buyer a family member or insider?
- Was the debtor insolvent at the time?
Legitimate sales are fine
Selling property at fair market value is perfectly legal, even right before filing. The issue is the discount. If you sell your car for what it is actually worth, the cash proceeds replace the car in your estate. The trustee has no complaint because the estate was not diminished.
Problems arise when the sale is really a disguised gift -- selling property to insiders at a steep discount to keep it out of the bankruptcy estate.
Garage sales and personal property. Selling household items at typical garage-sale prices is generally not a problem because the items have low liquidation value anyway. But selling a boat, RV, jewelry, or other high-value asset at a steep discount within 2 years of filing will draw trustee scrutiny.