Articles Posted in Fraudulent Transfers

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dhester from morguefile.comThe term “payday loan” refers to a financial transaction in which a lender makes an unsecured loan, usually of a relatively small amount of money, to a borrower at a high rate of interest and for a very short term. The name comes from a requirement by many lenders that borrowers repay the loan amount and interest from their next paycheck. Payday loans may present special challenges to a debtor, depending on the debtor’s circumstances and the terms of the agreement with the lender.

Payday lenders, who may also use terms like “cash advances” and “check cashing” for their business model, offer certain advantages over other forms of credit. Someone who needs money quickly, due to an emergency situation, is likely to get money far more quickly from a payday lender than from a bank. A person with a poor credit score may still be able to obtain a payday loan if they can show employment history and steady income. A typical payday loan includes the borrower’s agreement to make periodic payments to the lender, or to pay the amount back in full from a future paycheck. The borrower pays a fee to the lender that is similar to a significantly high rate of interest. The lender may require the borrower to provide a post-dated check for the total amount owed, or to provide bank account wire transfer information.

In a Chapter 7 or Chapter 13 bankruptcy case, payday loans are considered low-priority unsecured loans. At least two challenges may arise with regard to payday loans. The lender may challenge the dischargeability of the debt based on factors common to such loans. Additionally, if the borrower provided a postdated check to the lender, the automatic stay might not prevent the lender from collecting on the loan. Continue reading

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2businessbayIn a bankruptcy proceeding, a trustee may avoid transfers made, or obligations incurred, by the debtor during the two years prior to the filing date, if the transfer or obligation was actually or constructively fraudulent. 11 U.S.C. § 548(a). The Ninth Circuit recently considered whether a transfer made to pay a purported debt was constructively fraudulent, finding that the Bankruptcy Code requires courts to apply state law. In re Fitness Holdings International, Inc., No. 11-56677, slip op. (9th Cir., Apr. 30, 2013). The court articulated a procedure for evaluating a purported debt, and it held that courts have the authority to recharacterize a debt under certain circumstances.

The debtor, Fitness Holdings International (FHI), signed multiple promissory notes to its sole shareholder, Hancock Park (HP), in exchange for over $24 million in funding from 2003 to 2006. The company also received about $12 million in loans from Pacific Western Bank (PWB) in 2004, secured by FHI’s assets and guaranteed by HP. In June 2007, FHI refinanced its loans with PWB, which included favorable repayment terms and a release of HP from its guarantee. From the funds received in the refinance, FHI made a $12 million payment to HP to pay off its unsecured promissory notes. Despite these efforts, FHI filed for Chapter 11 bankruptcy in October 2008. Continue reading