Fraudulent Transfers in Texas: Why to Avoid Them

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When facing a lawsuit or civil judgment, some debtors might be tempted to transfer assets to family or friends to shield them from creditors. However, such actions can backfire, as they may be deemed fraudulent transfers under Texas law.

Fraudulent transfers can lead to serious legal consequences, including the reversal of the transfer and additional penalties.

Full a Full list of property exemptions in Texas Read: Understanding Property Exempt from Judgment Collection in Texas.

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What is a Fraudulent Transfer?

A fraudulent transfer occurs when a debtor transfers property or assets to another party with the intent to hinder, delay, or defraud creditors. Texas law governing fraudulent transfers is found in the Texas Uniform Fraudulent Transfer Act (TUFTA), codified in Chapter 24 of the Texas Business and Commerce Code.

Under TUFTA, a transfer is fraudulent if it is made:

With actual intent to defraud creditors, or
Without receiving reasonably equivalent value in return, if:
- The debtor was insolvent at the time of the transfer, or
- The debtor became insolvent as a result of the transfer.

Examples of Fraudulent Transfers

A person is judgment proof if they own no assets that fall outside the exemption protections. For example:

They do not have significant cash or savings that exceed protected amounts.
They do not own luxury items or investment properties that could be seized.

Even if a creditor obtains a judgment, it does not mean they can collect if the debtor has no non-exempt income or assets. Being judgment proof effectively shields the debtor from enforcement actions like bank levies, property seizures, or wage garnishments for most types of consumer debts.

Examples of Fraudulent Transfers

Transferring Assets to Family or Friends
- Example: A debtor deeds a vacation property to their sibling for a nominal price right after being served with a lawsuit. If the intent is to keep the property out of reach of creditors, this transfer could be reversed.
Selling Assets for Below-Market Value
- Example: A debtor sells a luxury car worth $50,000 to a friend for $5,000. Such a transaction might be viewed as a fraudulent attempt to undervalue the asset and shield its true value from creditors.
Transferring Funds to a Spouse’s Bank Account
- Example: A debtor moves all their funds from a personal account into a spouse’s account after creditors have obtained a judgment. Courts may reverse this transfer if it was done to frustrate collection efforts.
Gifting Property
- Example: A debtor gifts valuable jewelry to a relative when they are unable to pay a significant credit card debt. This could be considered a fraudulent transfer because no value was exchanged.

Indicators of Fraudulent Intent

Courts look at various factors, or “badges of fraud,” to determine whether a transfer was fraudulent. These include:

The transfer was made to an insider (e.g., family member or business partner).
The debtor retained possession or control of the property after the transfer.
The transfer was concealed or not disclosed to creditors.
The transfer occurred shortly before or after a creditor’s claim arose.
The debtor received less than reasonably equivalent value for the property.
The debtor was insolvent or became insolvent shortly after the transfer.

No single factor is conclusive; rather, courts consider the totality of circumstances.

Legal Consequences of Fraudulent Transfers

If a transfer is deemed fraudulent, creditors have several remedies under TUFTA, including:

Reversal of the Transfer: Courts can void the transaction and return the property to the debtor’s estate for creditor access.
Injunctive Relief: Creditors may obtain court orders to prevent further transfers of assets.
Monetary Damages: Creditors may seek the value of the fraudulently transferred asset if it cannot be recovered.
Additional Penalties: Debtors may face legal fees and other penalties, increasing their financial burden.

Why Debtors Should Avoid Fraudulent Transfers

Increased Legal Exposure

Fraudulent transfers can expose you to lawsuits under TUFTA, compounding your financial and legal challenges.

Difficulty Resolving Debt

Engaging in fraudulent transfers can damage your credibility in negotiations with creditors or during bankruptcy proceedings, reducing the likelihood of favorable outcomes.

Reputational Damage

Fraudulent conduct can tarnish your reputation and complicate future financial dealings, such as applying for credit or loans.

Criminal Implications

While TUFTA deals primarily with civil remedies, certain fraudulent transfers may also expose debtors to criminal liability, particularly if fraud is proven beyond a reasonable doubt.

Conclusion

While it might seem tempting to transfer assets to protect them from creditors, fraudulent transfers can result in severe legal and financial consequences. Texas law allows creditors to undo such transfers and even impose penalties, making it a risky and ill-advised tactic. Instead, focus on lawful methods of protecting your assets and resolving your debts.

By avoiding fraudulent transfers and taking proactive steps, you can address your financial situation responsibly and minimize further complications.

Mike Weston, Esq.

Mike Weston is a seasoned debt lawsuit defense attorney and founder of Weston Legal. Since 2005, Mike has devoted his career to compassionately helping consumers struggling with issues involving their personal and business debts. Mike is grateful to have been able to help tens of thousands of clients become empowered with knowledge on the path to financial stability.