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Sham Divorce and Fraudulent Transfers

Divorce and debt are two things most people hope to avoid encountering whenever possible. Having creditors proverbially banging down your door can be as unpleasant as fighting over assets in a divorce. However, some couples attempt to use divorce as a vehicle to protect their assets from creditors. For example, a husband will transfer his assets to his wife in a separation or divorce agreement so that creditors cannot use them to fulfill the debts he owes them.

Using a divorce property settlement agreement to protect your assets from creditors is actually fraud. It violates fraudulent conveyance laws, can be the basis of criminal charges against at least one of the debtors, and can be the basis for denying discharge (cancellation) of debts in bankruptcy proceedings.

There are many reasons that could prompt a married couple to try to use a divorce property settlement as a way to protect their assets from creditors. Maybe a couple intends to divorce anyway and is facing potential bankruptcy or other issues with creditors. Possibly you have family heirlooms that will be non-exempt from creditors in bankruptcy that you want to protect. Or perhaps you have no desire to do either of these things but do want to create a property settlement agreement in your divorce judgment—it can still be important to be aware of what courts are vigilant in interpreting as fraud.

The laws prohibiting this behavior as a societal interest are extremely old. The federal version of the law since 2014 has been called the Uniform Voidable Transactions Act (UVTA), and is based on English common law dating back to the 1600s. The UVTA, as adopted by the individual states, exists to provide a remedy for creditors against fraudulent transfers by letting the transactions be voided and returning the value of the property to the debtor or their estate.

A debtor’s trustee has to prove by clear and convincing evidence to the court that the debtor intended to defraud. However, because people rarely admit to such things, North Carolina courts look at circumstantial evidence to see if fraudulent intent can be inferred.

North Carolina’s version of the UVTA provides a non-exhaustive list of thirteen different examples of potentially fraudulent activity, referred to as “badges of fraud.” Just because a person has committed one of these things does not mean fraudulent intent is proven, but the presence of more than one can lead a court to a presume that one of the spouses intended to defraud:

  1. Transferring property to an insider (family member, friend, or business partner)
  2. Maintaining possession or control of property after transferring it
  3. Hiding or concealing a transfer of property
  4. Transferring property after the debtor gets threatened with a lawsuit
  5. Transferring most or all of the debtor’s property
  6. Hiding by the debtor
  7. Concealing the debtor’s assets
  8. The debtor receiving less than equal value in a transfer
  9. The debtor’s bankruptcy immediately before or after the transfer
  10. Transfer immediately before or after the debtor acquires a substantial debt
  11. If the debtor transfers essential business assets to a lien-holder, who then transfers the assets to an insider
  12. The debtor receiving less than the equivalent value for a transfer while he reasonably should have known that he would be racking up debt he could not pay off
  13. Transfers that are not in the course of legitimate tax or estate planning.

A debtor can overcome the presumption of fraudulent intent by proving a legitimate purpose for the transfer(s). Transfers that are actually pursuant to a bona fide separation agreement or divorce judgment do provide this legitimate purpose. A sham separation or divorce that was in name only, however, does not.

North Carolina courts have developed “badges” for detecting or sham divorces and separations as well. Again, one is not dispositive but together these badges help a court infer fraud. These include:

  1. “Fast tracked” divorces
  2. Quickly agreed to splitting of property
  3. One of the spouses not being represented by counsel in the divorce
  4. If one of the former spouses files for bankruptcy shortly after the divorce decree is entered
  5. The spouses continuing to live together in the same house that one of the spouses transferred to the other
  6. The transferor spouse continuing to pay the taxes, mortgage and other costs for the transferred house
  7. If the couple still holds themselves out as married to the public
  8. The inequitable distribution of assets and debt in the divorce

Even if a divorce is not a sham and both parties legitimately want it, it is enough that one of the parties intended to hide assets from creditors by transferring them in the otherwise legitimate divorce settlement agreement. On the other hand, even if you have no intent to defraud, it can be important to be aware of what courts will interpret as fraud.

If you are contemplating divorce or are being accused of fraud, it is important to have a skilled and dedicated attorney who focuses in that area of law. Arnold & Smith, PLLC has a board-certified Family Law Practice that helps individuals with any manner of family law issues, as well as experienced criminal defense attorneys who excel in defending people’s rights. Contact us today for a consultation on your case so our attorneys can help you understand your options.