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When Can Asset Protection Strategies Be Considered Fraudulent Transfers?

Individuals and business organizations may legitimately seek to preserve wealth through various devices and methods known collectively as asset protection strategies. These often involve transferring money or other property into trusts and/or foreign bank accounts — which is perfectly legal so long as the transfer is not “fraudulent” in nature.

A fraudulent transfer occurs when a debtor moves assets in a way that frustrates the rights of one or more creditors. If the debtor transfers the asset with the intention to defeat or frustrate the rights of a creditor, the transfer may be “fraudulent-in-fact.” If the debtor’s transfers leaves the debtor insolvent (without sufficient assets to pay his/her/its creditors), the transfer may be “fraudulent-in-law.”

Illinois has adopted the Uniform Fraudulent Transfer Act, which prohibits fraudulent transfers and provides aggrieved creditors with remedies. The law does not specifically define the level of intent that constitutes fraud-in-fact, but sets out a number of criteria for making that determination, called “badges of fraud.” These badges include:

  • Timing of asset the transfer — If a debtor moves assets shortly after the entry of a judgment or commencement of a major lawsuit against the debtor, chances are that the debtor intended the transfer to frustrate the claimant.
  • Concealment — Fraud may arise when the debtor hides assets or takes steps to conceal asset transfers, such as by mischaracterizing asset transfers as business expenses, loans or other routine transactions.
  • Insolvency — Fraud may arise when asset transfers render the transferor insolvent – ie., having little or no money left to pay legitimate claims, making the transferor “judgment proof.”
  • Unusual claims — Monetary claims are commonly made against companies in the ordinary course of business. Such claims are often covered by the company’s insurance and do not require any special strategy for asset protection. If, however, a company is accused of illegal or anti-competitive practices, a significant transfer of assets that is contemporaneous with the claim would raise suspicion of fraud.

It’s not always clear whether an asset transfer is prudent planning or a scheme to evade a credible claim or threat of legal action. Fraudulent transfer litigation involves careful assessment and presentation of the facts and circumstances in order to determine the nature and intent of the transfers at issue.

Schwartz Law Group, LLC in Chicago is a full service commercial litigation law firm serving the metropolitan area and Northern Illinois. If you or your company have a debt collection or asset protection issue, please feel free to contact us online or call 312-436-1442 for a consultation.

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