Tip: How Creditors Can Recover Debts from “Deadbeats”

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Here’s a tip on how creditors can recover debts from “deadbeats.”  Here is a common situation that a small company often faces when attempting to collect a debt: A payment is due under the business contract or loan, and the debtor company’s owner is telling you that she isn’t paying, and besides, she has transferred all her assets to her husband and tells you that you won’t be able to collect a dime from her. For a small business, this kind of “deadbeat” occurrence can spell doom.  Let’s call it the keep-away syndrome, a debtor pretends to be a deadbeat.  A two-step process can determine whether this keep-away strategy will work.

It’s one thing for the debtor to believe they have put their assets beyond the reach of all creditors; it’s another whether the facts and the legal analysis uncovers harmful truths.

In a transfer situation, the initial focus is “consideration,” meaning a lawyer will analyze just what benefit the debtor received in return for the transfer of her assets. If the assets were delivered by the debtor to her husband or any other trusted third party as a gift, then there may be a fraudulent transfer, which would potentially unwind the gift transaction, provided that fraud can be shown. So, the first step is establishing whether any consideration was received in exchange for the transfer.

In most cases, “fraud” is an intentional act, so that means that the debtor will have to prove that the transfer was made with full knowledge, and not by some negligent error.  This isn’t easy to prove.  The claim for intentional fraud means that you have to show that there was a lack or inadequacy of consideration; that the transferee enjoyed a close relationship with the transferor (debtor); whether the transferor (debtor) still retains possession or use of the “transferred” property; the financial condition of the transferor before and after the transfer; and/or the general timing of the transfer event.

In some cases, garden variety fraud can’t be proved.  But in these instances of questionable transfers of assets by the debtor, it is very important to know that in addition to garden variety fraud, which, again, is often hard to prove, there is also something called “Constructive Fraud,” which is fraud without the intention to commit fraud, and if constructive fraud can be shown, the “deadbeat” may have to pay up.

Here are the elements of proving a constructive fraud claim:  at the time of the transfer, 1) the debtor was involved, 2) was rendered insolvent by the transfer, or 3) was a defendant in a lawsuit at the time of the transfer.

Therefore, based upon the fact patterns and whether perhaps the debtor gave the asset away to her husband as a gift and was rendered insolvent, then the creditor may be able to recover on the debt. There are professional asset searchers who can determine the facts behind transfers, and unwind a transaction that supposedly made the debtor unable to pay a debt—or a judgment.

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