Q: I am in financial distress and some of my creditors are pursuing me aggressively. I want to transfer some assets to my adult kids and to my wife, but my lawyer has advised me against doing it. This seems like a good way to keep the creditors away from these assets.
A: Listen to your lawyer, he is giving you good advice. This type of move can land you in a big pot of hot water – hotter than the water you’re currently bathing in.
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A transfer that has no real or bona fide purpose, but is done in the face of financial pressure, can be held to be a civil fraud. These sorts of transfers are called fraudulent transfers, fraudulent conveyances or fraudulent preferences.
Let’s assume you own a truck and don’t owe a penny against it. Let’s also assume it is not exempt from being seized by your creditors under the law of your province. In order to keep it away from those creditors, you transfer it to a trusted family member. You sign a bill of sale to your spouse or child and get the title in that name, but no money changes hands.
Your creditors do a motor vehicle check and find out you owned that truck. They look for it to seize, to sell and apply the money against their debt and then find out about the transfer.
Your creditors can sue not only you, but also the spouse or child. They can allege that the transfer was not bona fide. They can also allege there was no consideration or insufficient consideration.
Consideration means that there was no cash or any other thing of value flowing from the recipient to you. They paid nothing for the vehicle or an amount far below its fair market value.
Your creditors will sue on that basis. They will seek a reversal of that transfer, so that the truck ends up back in your name so it can be seized. They may also seek the costs of that legal action from you and from your family member.
In assessing such claims, courts and judges look for the badges of fraud, which are factors the court will examine to see if the transfer is real or should be reversed.
Courts look at factors such as: Was the transfer to a family member or “insider?” Was it made with the intent to hinder, defeat or delay creditors in collecting debts? Did you receive a fair return for the asset, cash or something else roughly equal to the asset’s fair market value? Was the transfer done openly or concealed? Did you use or control the property even after it was transferred?
The court takes a broad view of the deal. Putting it bluntly, the court wants to see if the deal stinks or not to see if it should be reversed.
Also note that if you go bankrupt after doing such a transfer, your trustee in bankruptcy can review any transfer you made to a family member in the last two years. You have a legal obligation to disclose all such deals to the trustee. The trustee has the power to reverse such deals or to seek authority from the courts to do so.
Don’t mistake this for criminal charges of fraud. The term fraudulent conveyance is a civil term, meaning you committed a civil fraud that is addressed by a civil court. However, your conduct can lead to criminal charges being brought against you. This bright idea can quickly turn into a dark legal nightmare, from which you will have trouble waking.
What seems like a good way to preserve your assets is a highly dangerous legal move that can expose you and your family to costs and to increased liability to creditors.
I’d stay far away from this plan of action.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
