Spotting the Signs of Fraudulent Transfers

Imagine a scenario where a debtor, facing mounting financial pressure, strategically transfers assets to avoid paying what is owed. The dissipation of resources to hinder creditors from collecting their debts is known as a fraudulent transfer. 

The Illinois Uniform Fraudulent Transfer Act (IUFTA) allows creditors to challenge transfers made by debtors with the intent to “disturb, delay, hinder or defraud” them. However, proving such intent can be challenging. This is where the concept of “badges of fraud” comes in. Badges are red flags that courts consider when evaluating the legitimacy of a transfer.

Here’s a look at the 11 badges of fraud outlined in the IUFTA:

1. Transfer to an insider — If the recipient of the transferred assets is a relative, friend or business associate of the debtor, it raises suspicion.
2. Retention of possession or control — If the debtor continued to use or manage the transferred property after the supposed transfer, this suggests the transfer might not be genuine.
3. Secrecy surrounding the transfer — Was the transfer deliberately hidden or not properly documented? This could be a sign of fraudulent intent.
4. Lawsuits or threats preceding the transfer — If the debtor faced legal action or threats of lawsuits before transferring assets, it suggests a potential attempt to shield their resources.
5. Transfer of substantially all assets — A debtor transferring a significant portion of their assets, especially when facing financial difficulties, raises a red flag.
6. Debtor absconding — If the debtor disappears shortly after the transfer, it strengthens the case for fraudulent intent.
7. Concealment of assets — Did the debtor attempt to hide assets before or after the transfer? This could be a sign of an attempt to avoid creditors.
8. Inadequacy of consideration — If the value received by the debtor in exchange for the transferred asset is significantly less than its actual worth, it suggests a fraudulent scheme.
9. Debtor’s insolvency — If the debtor was unable to pay debts when due at the time of the transfer, if the transfer itself render the debtor insolvent, this is a strong indicator of fraud.
10. Transfer around debt — If the transfer occurred shortly before or after the debtor incurred a significant debt, this timing could suggest an attempt to avoid repayment.
11. Transfer of essential assets to insider through lienor — If a debtor transfers essential business assets to a creditor (lienor) who then redirects them to an insider of the debtor, it suggests a scheme to circumvent debt collection.

While badges of fraud can be valuable indicators, they are not foolproof. The presence of a single badge might not suffice for a court to declare a transfer fraudulent. Conversely, a transfer might exhibit several badges without necessarily being fraudulent. 

If you suspect a debtor has engaged in a fraudulent transfer, an experienced attorney can meticulously investigate the situation, analyze the possible presence of badges of fraud and build a strong case to help you recover what’s rightfully yours.

At Schwartz Law Group, LLC in Chicago, our attorneys are established authorities in the field of fraudulent transfer litigation. If you need assistance in collecting on a judgment and you suspect the debtor has committed fraud, call us at 312-436-1442 or contact us online to arrange a consultation.