Timing Under State Law

April 13, 2006

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In order to avoid creditor challenges to asset transfers, you'll need to be aware of how the Uniform Fraudulent Transfers Act (UFTA) and the bankruptcy code imposes time limitations on these transfers.

In addition, some states have specific timing provisions dealing with conversion of nonexempt assets into exempt assets, apart from their version of the UFTA. Typically, these provisions exist in states that provide generous exemptions, such as Florida and Texas, where conversions occur on a regular basis. These specialized statutes will take precedence over the general provisions of the UFTA.

While it may first appear that such statutes create a disadvantage for debtors, the opposite is true when the specialized statute provides a shorter statute of limitations.

For example, in Texas, a creditor must mount a challenge within two years after the transfer. This compares, of course, to four years under the UFTA. Thus, in Texas, asset exemption transfers made more than two years before a challenge will escape scrutiny. Other types of transfers are still subject to the UFTA.

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The homestead exemption is established by the constitution in some states, including Florida and Texas.

Due to this fact, the Florida Supreme Court declared unconstitutional, and therefore invalid, a specialized statute that Florida had enacted to regulate fraudulent asset exemption transfers.

A legislature may not, by statute, take away a constitutional right. This is a fundamental principle of law. A similar argument can be made in Texas.

However, as of October 17, 2005, new federal law does not allow proceeds from fraudulent actions to be shielded by state exemption laws.