diff --git a/modules/apps/transfer/ibc_module_test.go b/modules/apps/transfer/ibc_module_test.go
index 43fae9a3d2b..9ec0430be5f 100644
--- a/modules/apps/transfer/ibc_module_test.go
+++ b/modules/apps/transfer/ibc_module_test.go
@@ -4,6 +4,8 @@ import (
 	"errors"
 	"math"
 
+	sdkmath "cosmossdk.io/math"
+
 	"github.com/cosmos/cosmos-sdk/crypto/keys/secp256k1"
 	sdk "github.com/cosmos/cosmos-sdk/types"
 
@@ -14,6 +16,7 @@ import (
 	channeltypes "github.com/cosmos/ibc-go/v8/modules/core/04-channel/types"
 	porttypes "github.com/cosmos/ibc-go/v8/modules/core/05-port/types"
 	host "github.com/cosmos/ibc-go/v8/modules/core/24-host"
+	ibcerrors "github.com/cosmos/ibc-go/v8/modules/core/errors"
 	ibctesting "github.com/cosmos/ibc-go/v8/testing"
 )
 
@@ -230,9 +233,11 @@ func (suite *TransferTestSuite) TestOnChanOpenAck() {
 			"success", func() {}, nil,
 		},
 		{
-			"invalid counterparty version", func() {
+			"invalid counterparty version",
+			func() {
 				counterpartyVersion = "version"
-			}, types.ErrInvalidVersion,
+			},
+			types.ErrInvalidVersion,
 		},
 	}
 
@@ -268,6 +273,99 @@ func (suite *TransferTestSuite) TestOnChanOpenAck() {
 	}
 }
 
+func (suite *TransferTestSuite) TestOnTimeoutPacket() {
+	var path *ibctesting.Path
+	var packet channeltypes.Packet
+
+	testCases := []struct {
+		name     string
+		malleate func()
+		expError error
+	}{
+		{
+			"success",
+			func() {},
+			nil,
+		},
+		{
+			"non-existent channel",
+			func() {
+				packet.SourceChannel = "channel-100"
+			},
+			ibcerrors.ErrNotFound,
+		},
+		{
+			"invalid packet data",
+			func() {
+				packet.Data = []byte("invalid data")
+			},
+			ibcerrors.ErrInvalidType,
+		},
+		{
+			"already timed-out packet",
+			func() {
+				module, _, err := suite.chainA.App.GetIBCKeeper().PortKeeper.LookupModuleByPort(suite.chainA.GetContext(), ibctesting.TransferPort)
+				suite.Require().NoError(err)
+
+				cbs, ok := suite.chainA.App.GetIBCKeeper().PortKeeper.Route(module)
+				suite.Require().True(ok)
+
+				suite.Require().NoError(cbs.OnTimeoutPacket(suite.chainA.GetContext(), packet, suite.chainA.SenderAccount.GetAddress()))
+			},
+			errors.New("unable to unescrow tokens"),
+		},
+	}
+
+	for _, tc := range testCases {
+		tc := tc
+		suite.Run(tc.name, func() {
+			suite.SetupTest() // reset
+
+			path = ibctesting.NewTransferPath(suite.chainA, suite.chainB)
+			path.Setup()
+
+			coinToSendToB := sdk.NewCoin(sdk.DefaultBondDenom, sdkmath.NewInt(42))
+			timeoutHeight := suite.chainA.GetTimeoutHeight()
+			msg := types.NewMsgTransfer(
+				path.EndpointA.ChannelConfig.PortID,
+				path.EndpointA.ChannelID,
+				sdk.NewCoins(coinToSendToB),
+				suite.chainA.SenderAccount.GetAddress().String(),
+				suite.chainB.SenderAccount.GetAddress().String(),
+				timeoutHeight,
+				0,
+				"")
+			res, err := suite.chainA.SendMsgs(msg)
+			suite.Require().NoError(err) // message committed
+
+			packet, err = ibctesting.ParsePacketFromEvents(res.Events)
+			suite.Require().NoError(err)
+
+			module, _, err := suite.chainA.App.GetIBCKeeper().PortKeeper.LookupModuleByPort(suite.chainA.GetContext(), ibctesting.TransferPort)
+			suite.Require().NoError(err)
+
+			cbs, ok := suite.chainA.App.GetIBCKeeper().PortKeeper.Route(module)
+			suite.Require().True(ok)
+
+			tc.malleate() // change fields in packet
+
+			err = cbs.OnTimeoutPacket(suite.chainA.GetContext(), packet, suite.chainA.SenderAccount.GetAddress())
+
+			expPass := tc.expError == nil
+			if expPass {
+				suite.Require().NoError(err)
+
+				escrowAddress := types.GetEscrowAddress(packet.GetSourcePort(), packet.GetSourceChannel())
+				escrowBalanceAfter := suite.chainA.GetSimApp().BankKeeper.GetBalance(suite.chainA.GetContext(), escrowAddress, sdk.DefaultBondDenom)
+				suite.Require().Equal(sdkmath.NewInt(0), escrowBalanceAfter.Amount)
+			} else {
+				suite.Require().Error(err)
+				suite.Require().Contains(err.Error(), tc.expError.Error())
+			}
+		})
+	}
+}
+
 func (suite *TransferTestSuite) TestOnChanUpgradeInit() {
 	var path *ibctesting.Path