“Reasonably equivalent value” refers to a legal concept used primarily in bankruptcy and fraudulent transfer law.
It describes the market value of an asset at the time of its transfer. This concept is crucial when determining if a transaction was fair, particularly if a debtor transferred assets before filing for bankruptcy.
Reasonably equivalent value is not the same as fair market value. A debtor is not expected to sell assets for full fair market value to avoid the taint of fraudulent conveyance. The law permits debtors to sell at a discount for whatever reason.
A few court decisions attempt to define reasonably equivalent value in relation to fair market value. The general guideline is called “the 70% Rule.” Under the rule, a transfer is fair if the consideration received is at least 70% of fair market value. People should plan on receiving more than 70% of fair market value to better defend challenges to asset transfers.
If a debtor sells or gives away property for less than its reasonably equivalent value shortly before filing for bankruptcy, the transaction might be deemed fraudulent. This could lead to the reversal of the transfer to ensure creditors receive fair treatment.
Fraudulent conveyance is always the largest issue in asset protection planning. A debtor has a strong defense against a fraudulent conveyance threat if the debtor can prove that he sold or transferred an asset for reasonably equivalent value.
