What is the Look-Back Period in Pennsylvania Bankruptcy?

Pennsylvania has a “look-back” period of four years, giving bankruptcy trustees ample time to undo or “clawback” a transaction considered a “fraudulent conveyance.” Having to defend a transaction that occurred four years preceding a bankruptcy filing can cause stress to anyone. 

Under federal law, the lookback period for fraudulent transfers is two years. However, in Pennsylvania, state law increases this period to four years. Part of filing for bankruptcy is the pre-planning process. There are steps you can legally take before filing to protect some of your assets. However, when potential debtors decide to take action to protect their property or pay back their friends, it could jeopardize their case. Our Pennsylvania bankruptcy attorneys will work closely with you before your case is filed to help avoid potential issues. 

Here, Young Marr & Associates explain the inner workings of the look-back period in Pennsylvania. Contact us if you have questions about how to defend an old transaction and to learn about how these claims can interfere with your bankruptcy petition. If you are contemplating filing for bankruptcy, we can guide you through the process so you don’t have to worry about your past transactions. Call our law offices at (215) 701-6519 for a free consultation and start your pre-filing planning. 

Initiating the Bankruptcy Look-Back Period

A bankruptcy trustee is assigned to every petition. Under 12 Pa. Cons. Stat. § 5109, Pennsylvania law provides a four-year limit to file a lawsuit known as a “voidable transfer.” A voidable transfer is generally a questionable transaction, imbued with some type of deceit linked to a specific abuse of the U.S. Bankruptcy Code. State laws are applicable in federal bankruptcy cases with respect to voidable transfers or transactions. 

A bankruptcy trustee initiates a look-back period claim as a representative of the bankruptcy estate where creditors also have rights. Most people don’t realize that the trustee can’t just reclaim those transactions without filing an official legal complaint in a civil court and proving the case. This complaint must state specific facts establishing that the debtor’s actions essentially amounted to fraud. 

Most lawyers in Pennsylvania will agree that fraud is easy to plead but hard to prove. There is a specific provision pursuant to 11 U.S.C. § 544(b) providing that the transaction in question must meet the higher standard of a “fraudulent conveyance.” A fraud claim is not easily proven, and it carries a greater evidentiary requirement than other civil claims. 

Moreover, for purposes of bankruptcy law, fraudulent conveyances are essentially transactions made without receiving a “reasonably equivalent value,” which means you didn’t receive fair payment for the transfer. Also, if the debtor was insolvent or rendered insolvent as a result of the transaction, this meets the standard of a fraudulent conveyance. Insolvency means generally unable to pay creditors, the debts effectively exceeding the income. You should contact an attorney to ask more questions about how it applies to your circumstances. 

What Types of Transactions Will the Court Reverse in a Pennsylvania Bankruptcy?

A trustee is essentially looking for a transaction intended to hide an asset that could be sold and liquidated. The most common examples are transfers or sales to family members or close associates. The transfers can include the transfer of deeds to homes and other real estates as well as interest in assets such as stocks and shares of other valuable investments without receiving proper compensation. Any transaction preceding the bankruptcy for less than market value can be challenged in a bankruptcy process. 

Another example is when someone transfers a valuable asset to one creditor and files for bankruptcy later, leaving other creditors without the possibility of payment. The goal of the trustee in looking back to reach out to those assets is to liquidate them in order to pay other creditors. This can happen in a wide variety of circumstances that don’t have to relate to fraudulent intent. With the assistance of an experienced attorney, your actions don’t have to undergo unnecessary scrutiny. 

Fraudulent Transfers in a Pennsylvania Bankruptcy?

A fraudulent transfer, or conveyance, is associated with the bankruptcy process. Typically, a fraudulent conveyance occurs when a debtor moves, rearranges or transfers their assets to another account or owner to hide those assets from a creditor or the bankruptcy trustee. 

Before filing for bankruptcy, there are a number of legal steps a debtor could take to protect their assets. This is part of the pre-bankruptcy planning process and should be done with the advice and consultation of our Philadelphia bankruptcy attorneys. Any attempts to transfer or hide assets to impede creditors’ collection attempts could be a violation of the law and subject to criminal and civil liability. 

What is a Fraudulent Transfer?

Before discussing what makes a transfer fraudulent, it is important to understand what a transfer is within the context of bankruptcy. Usually, a transfer is moving the ownership of property from one entity to another. A transfer could be tangible and intangible property or an interest in property that reduces the value the debtor retains. A transfer could also be the act of incurring additional debt that reduces the value of a debtor’s assets. 

Another important concept to understand is solvency. A debtor is a solvent when they can meet their long-term debts and obligations. When a debtor is unable to meet their financial obligations, they are considered to be insolvent. A person could be insolvent and not in bankruptcy. However, every person in bankruptcy is insolvent. 

As stated above, a fraudulent transfer occurs when a debtor moves their assets to hide them from creditors, the trustee, or delay the payment of a debt. Fraudulent conveyances could be intentional or unintentional transfers. If a debtor transfers assets while insolvent, then the transfer will likely be evaluated as a fraudulent conveyance. 

There are three elements necessary to prove a transfer was fraudulent. A creditor will have to demonstrate that the debtor owed them a debt. Next, the transferred property could have been used to pay the debt. Finally, the debtor must have intended to defraud the creditor. 

Actual Fraud and Constructive Fraud

Some transfers are clearly and intentionally fraudulent. For example, selling a home to a relative for far less than the market value or paying off a debt to a family member before filing for bankruptcy. In both situations, the debtor is transferring assets that could be used to pay their other debts. 

However, a fraudulent could be intentional or constructively fraudulent. A constructive fraudulent transfer is treated under the law as fraud because it violates the public interest. Typically, this is only a civil matter and rarely, if ever, criminal. 

Constructive fraud is difficult to understand because the debtor did not intend to deceive their creditors or the trustee. Generally, a fraudulent conveyance that is unintentional will grant an advantage to a person or entity that they would not have under ordinary circumstances. 

For example, a debtor could transfer property when they are insolvent or before they are about to incur debts they cannot afford to pay back. Additionally, if a transfer leaves a debtor with an unreasonably insignificant amount of assets, it could be considered a fraudulent conveyance. 

Evidence of Fraudulent Conveyances in Pennsylvania Bankruptcies

Proving fraud is difficult. However, in some cases, the evidence is clear. Because most debtors who transfer property to protect it or to avoid paying their creditors rarely admit their intentions, the court will look for certain facts and circumstances that could constitute fraud. 

A common way to avoid paying creditors is selling property for substantially less than its market value. For example, a person could sell their car to their brother for less than the “blue book” value. This example also illustrates another factor the court or creditors will look for – selling or transferring property to family members or close friends. Some debtors will transfer the ownership of their property to another person while retaining it for their own use. For instance, transferring title to their car while continuing to keep possession of the vehicle. If a debtor fails to disclose a transfer to their attorney or the court, it could be considered an intent to defraud. 

Unwinding a Fraudulent Transfer

When you file for bankruptcy, you are required to disclose your assets and any transfers. If you file a Chapter 7, a trustee could liquidate your non-exempt assets to pay your creditors. In Chapter 13, your assets will determine how much you are required to pay to your unsecured creditors. Therefore, the bankruptcy trustee has the right to unwind a fraudulent conveyance and recover the property. To accomplish this, the trustee must file an adversary complaint with the Bankruptcy Court. For example, if you paid your brother-in-law $5,000 to repay a personal loan thirty days before filing your case, a trustee could file a complaint against your brother-in-law to recover the funds. In other cases, a trustee could void a transfer of property, including a home or car. 

Why Do I Need to Know About the Look-Back Period?

Unfortunately, many people think that transferring an asset serves to protect or shield assets from creditors. This misconception can cause many troubles for someone who files for bankruptcy, because the U.S. Bankruptcy Code, particularly under Chapter 13, gives debtors the opportunity to protect their principal residence as well as a vacation home and other assets. Furthermore, your retirement accounts such as your 401k and other qualified accounts are protected up to $1.3 million. 

You should schedule a consultation with one of our attorneys today if you are concerned about the level of protection for your property during bankruptcy. Call us at (215) 701-6519 where one of our attorneys can discuss how you can keep your home, car, and other assets if you file for bankruptcy protection. 

The bankruptcy trustee has a duty to allocate the amounts discharged and liquidate the assets distributed to pay creditors. When the assets fall short, the trustee can look at multiple types of transactions and consider whether some are objectionable, such as “non-necessaries.” An attorney can explain what types of expenditures are considered non-necessaries. Trustees can look with suspicion at certain transactions and your attorney can explain your actions in the best light possible. 

Sometimes creditors report concerns over illegitimate expenses and bad faith actions toward their rights prior to and during a bankruptcy proceeding. If you are concerned that this can happen to you or someone you know, it’s vital to seek experienced legal representation immediately. As part of your bankruptcy filing, you provide a significant amount of disclosures that can avert misconceptions about your transactions and expenditures. 

Additional Protections to Creditors in Pennsylvania

Under the Pennsylvania Uniform Fraudulent Transfers Act (PUFTA), bankruptcy trustees have a wide ability to cancel transfers that are considered “constructively” fraudulent in that they were made with the intent to “hinder, delay or defraud” a creditor. 

This is very common in cases when a property is changed into someone else’s name while retaining the enjoyment of the property. This is considered a sham transfer. Another common example is when a debtor opens an account with a spouse as a tenant by the entirety, and such an account would constitute a fraudulent transfer under PUFTA. 

Call Our Trusted Bankruptcy Attorneys Serving Pennsylvania

Rash or ill-informed actions can cause serious problems down the road if you decide to file for bankruptcy. The skilled Allentown bankruptcy lawyers at Young Marr & Associates can help you avoid any of the pitfalls common to these types of transactions. For more information or to schedule a consultation, call our offices today at (215) 701-6519 or visit us online.