Fraudulent conveyances or preferential transfers of real property – especially those occurring immediately prior to or during a debtor’s insolvency – are areas of concern for bankruptcy and state courts. Transactions that increase the debt (loan-to-value) ratio by lowering the assets of a debtor, thereby leading to potential insolvency of the debtor, can create creditor’s rights problems.
In general, the Bankruptcy Code views any transactions occurring within 90 days prior to the filing of the petition for bankruptcy as a preferential transaction (i.e., an action that gives one creditor favorable treatment at the expense of other creditors), and Section 547 of the Code makes it easier to set aside such alleged preferential transfers. The Code strives to balance the equities of legitimate transfers with those which are fraudulent, intentional attempts to hide assets of the bankrupt estate. Therefore, all transfers, including those which are legitimate, are open to potential problems.
With respect to insuring a transaction involving a deed in lieu of foreclosure, it is recommended that an estoppel affidavit be obtained from the grantor/debtor that speaks to potential creditor’s rights problems. Such affidavit should state that the conveyance was intended to be an absolute conveyance given freely and voluntarily without coercion nor under duress; that the deed was not given as a preference against any other creditors of the affiant/grantor; that no other persons or entities held an interest in the property at time of conveyance; that the affiant/grantor is solvent and no other creditor’s rights would be prejudiced by the conveyance; and that the affiant/grantor is not under obligation of any other mortgage whereby a lien exists or has been created against the subject property.