Legal Actions for Creditors Against Fraudulent Debtors

The bankruptcy process can be a target for abuse by debt-holders if certain protections are not afforded to creditors. One of the biggest protections offered is to make any debt connected to fraudulent activity ineligible for discharge. In other words, the bankruptcy filer is obligated to pay those debts, no matter what, even if all their other debts are essentially forgiven.

A wide range of possible debt types can be considered fraud, under U.S. bankruptcy law. Typically, these debts involve purchases made within 1–2 years of the filing of the bankruptcy petition. However, state laws like New Mexico’s Uniform Voidable Transactions Act can also come into effect for purchases made up to four years ago.

Creditors have many means available to dispute the discharge of debt or its inclusion in a reorganization plan for a Chapter 11 or Chapter 13 filing. However, creditors also have a very short window to raise their objections and assert their interests in debts acquired through fraudulent means. Working with an experienced bankruptcy attorney team at New Mexico Financial & Family Law will allow your organization to quickly assess its options and move forward with the optimal strategy, given your goals and concerns.

Act quickly to protect your legal rights and financial interests if someone owes you money and is filing for bankruptcy. Call New Mexico Financial & Family Law today at (505) 503-1637 or contact us online to schedule a consultation to discuss your options and the best way forward.

Time Is of the Essence When Protecting Creditors’ Interests After Fraud

As a general rule, debts that are obtained through dishonesty (for instance fraud, and

embezzlement) or willful and malicious injury are not eliminated in bankruptcy. However, they

will be eliminated, or “discharged” in bankruptcy, if action is not taken.

There is a very short deadline to file an adversarial proceeding (similar to a civil lawsuit) in bankruptcy court if you receive notice that a debtor filed for bankruptcy.

Typically, a lawsuit must be filed within about three months of the bankruptcy petition if the creditor believes that the debt was the result of some dishonest or intentional activity. After the lawsuit is filed, the creditor must prove to a bankruptcy court that the debt should be non-dischargeable. Often the creditor is arguing dishonest acts (such as fraud) or intentional acts (such as assault) to have the court declare that the debts must pass through the bankruptcy, meaning the debtor is still obligated to pay them.

The time window can be even shorter in certain proceedings, as U.S. Bankruptcy Courts are motivated to handle cases as quickly as possible. You will also likely need time to document your petition and prepare for possible adversarial proceedings.

Pre-emptive action is often best, so reach out to an attorney the moment you receive notice that someone may file for bankruptcy in order to prepare the needed motions.

What Types of Debts or Activities Are Considered Fraudulent?

There are a number of different actions a debtor can take that can be considered fraudulent or indicative of fraud. These include:

• Fraudulent transfers (also called a fraudulent conveyance)
• Debts incurred in connection with illegal, malicious, or otherwise wrongful activity
• Purchases (especially for luxury goods/services) made with the intent of having them discharged
• Debts acquired through misrepresentation, including misrepresentation of ability to pay or misrepresentation of intended use of the borrowed capital

In addition, bankruptcy petitioners are not able to discharge debts that were not listed or that were not accurately depicted on their initial petition.

Each type of non-dischargeable debt is discussed in greater detail below.

Fraudulent Transfers

Technically speaking, a fraudulent transfer refers specifically to transfers made for the express or implied purpose of putting assets out of reach of either creditors or the bankruptcy court.

U.S. Bankruptcy Code §548(a) states that the trustee overseeing the bankruptcy case can void transfers made within two years of the submission of a petition for bankruptcy under the following conditions:

• (A) [They] made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
• (B) (i)[The petitioner] received less than a reasonably equivalent value in exchange for such transfer or obligation; and
  • (ii) (I)was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
  • (II)was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
  • (III)intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
  • (IV)made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

Importantly, those alleging a fraudulent transfer do not have to prove intent or bad faith (although it can benefit them to do so) as long as they can demonstrate that the transfer was not made to the financial benefit of the debtor, or if the transfer could not be considered as a matter “in the ordinary course of business.”

Transfers made under these circumstances can be set aside, meaning that they are either effectively reversed or they are set aside, both effectively making the debtor once again responsible to creditors for that interest, whether it is technically in their hands or not.

New Mexico Uniform Voidable Transactions Act

If a transfer occurred more than two years before the filing of the bankruptcy petition, the creditor may still be able to have the transfer voided under applicable state laws, per §544(b) of the U.S. Bankruptcy Code.

New Mexico’s own laws, provided under the Uniform Voidable Transactions Act, allow for the reversal of transfers made while the original owner was insolvent and/or when the sale involved proceeds far below a determined fair market value for the assets in question. This law has a reachback period of four years, compared to two, and may be applied even during the course of an in-progress bankruptcy case.

Preferential Transfers

Those filing for bankruptcy should not make transfers to specific creditors at the expense of others within 90 days of filing their petition. Any amount given to creditors in excess of $600, for individual debtors, or $6,825, for businesses debtors, can potentially be reversed so that the money can instead be distributed equally among priority creditors.

Debts Connected to Illegal, Malicious, or Otherwise Wrongful Activity

U.S. Bankruptcy Laws exempt debt from being considered if it is connected to any form of fraud, criminal activity, malicious intent, or other bad-faith-inspired motivation. Any wrongful activity connected to the purchase or transfer of the asset, therefore, could make it so that the debtor is forced to repay in full, even after bankruptcy concludes.

Luxury Purchases Made Within 90 Days of Petitioning

One common category of debts considered to be illegitimate are those derived from purchases made close to the date of submitting a bankruptcy petition. If the petitioner purchased luxury goods or services in excess value of $800 within 90 days of their petition, those transactions may either be reversed or set aside from consideration for discharge or reorganization.

Other purchases may fall under this umbrella even if they do not exceed the $800 value or occur within 90 days of the petition, provided that the creditor is able to sufficiently demonstrate that the purchaser either:

1. Did not intend to repay the debt, knowing they had the opportunity to have it reduced or eliminated through bankruptcy; or,
2. Had no reasonable means to repay the debt because they were already insolvent or were made insolvent by the purchases

Debts Acquired Through Misrepresentation

If a debtor made inaccurate statements in order to secure a debt, such as by making inaccurate statements about income or ability-to-pay on a loan application, that debt may be ineligible for discharge or reorganization.

Some assets may also be ineligible for exclusion or transfer if the current possessor used fraudulent means to hold onto them, such as by misrepresenting the value of their home to seek a strip down of a home loan’s value.

Work With Experienced Creditors’ Rights Attorneys to Make Your Case Before the Bankruptcy Concludes

Bankruptcy isn’t always a bad thing for creditors, especially when certain debts are exempted from consideration for the reasons outlined above. Ironically, bankruptcy can sometimes help a creditor with a non-dischargeable debt. This is because the creditor could have the court declare its debt non-dischargeable, but all other debts are discharged. If that happens, the post-bankruptcy debtor now has more resources to devote toward the non-discharged debt.

However, the window to make your case is tight. To protect your rights to have a debt declared non-dischargeable, a creditor must act quickly. If a lawsuit is not timely filed in bankruptcy court within the short timeframe allowed, even fraudulent debts will be discharged.

Reach out to our offices to discuss your options and form a game plan to hold debtors accountable for their ill-gotten gains. Schedule a confidential case discussion today when you call (505) 503-1637 or contact us online.