Concealment

April 13, 2006

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When creditors challenge asset transfers, court rulings indicate that concealment can be an extremely important factor in proving fraudulent intent in an actual fraud case. Lying on a loan application or in a bankruptcy petition is usually conclusive proof of fraud. Worse, yet, of course, it also is a crime that is taken very seriously by the courts.

Conversely, the opposite of concealment - disclosure - can negate a finding of fraud. Actual disclosure will almost always defeat a creditor's claim, absent some specific act of fraud on the part of the debtor.

If a bank or other lender provides a 125-percent mortgage loan, by definition, the liability created exceeds the asset that secures the loan. Because many of the debtor's other assets may be exempt, the debtor technically, from a balance sheet analysis, may be insolvent at the time of the loan.

However, the debtor's financial situation would be fully disclosed to the creditor before the loan was granted, on the loan application, tax returns, credit report, etc. Of course, the lender will charge an especially high rate of interest in this situation to cover the additional risks it knows it is taking. Here, the creditor cannot complain later that it was defrauded, as it knew exactly what it was doing at the time of the loan.

In addition, constructive notice of a debtor's financial situation can negate any allegation of fraud. "Constructive notice" means information that the creditor received or could have received. If a debtor's credit report, income tax records and home finance reports were available to the creditor, or even obtainable by the creditor, the debtor can show that the creditor knew or should have known about the debtor's financial situation. Thus, the creditor cannot now claim that he or she was defrauded.

Work Smart

Use your business's accounting software program to generate monthly financial statements. These statements and the entity's income tax returns can serve as constructive notice of the entity's financial condition to the creditors of the entity.

A creditor may not be able to mount a claim of fraud later if it could have accessed this information at the time credit was extended.

Similarly, an individual could use a finance software program that allows the tracking of income and expenses. These records, along with the individual's tax returns, can serve as constructive notice to creditors who extend credit to the individual.

Note that this argument is likely to be more acceptable when a one-time extension of credit is made, such as a loan, as opposed to the use of a credit card or other open account.

Motive and insolvency are more important factors in determining actual fraud cases.