Determining if a Transaction Can Be Ruled Voidable in Bankruptcy

When dealing with the issue of bankruptcy proceedings, the court system must often deal with the tendency of debtors to try to avoid paying back certain debts. Debtors also may attempt to transfer key properties or assets before filing in order to protect those assets from being seized and sold by the bankruptcy court. If you are facing a bankruptcy, you should know that certain transfers or asset reallocations may come under scrutiny if they are made shortly before a bankruptcy proceeding is initiated. These transfers may be voidable transfers and reversed in order for the court to use these assets as part of the bankruptcy.

Determining if a Transaction is a Voidable Transfer

How do you know if a transaction can be ruled a voidable transfer in bankruptcy? There are certain key elements to look for:

In general, transfers of an asset to specific creditor made within 90 days prior to a bankruptcy proceeding will be investigated by the trustee and will be deemed an “avoidable preference” if the reversal of that transfer would result in the ability to sell an asset that would provide a greater recovery for all concerned creditors in the scope of the bankruptcy proceeding.
In all cases, the benefit received by the debtor will be weighed against the potential benefits that the creditors would have received had the assets been liquidated in a chapter 7 bankruptcy proceeding before the decision is made as to whether or not the transfer is voidable.
In addition, certain preferential moves made by banks or other lenders may fall under the voidable category. For example, a common move by banks is to allow an individual facing bankruptcy to refinance their home at a more attractive rate in order to preserve their ownership stake in the home and save it from being liquidated in a bankruptcy sale. Under the current law, these types of transactions, if made within 90 days prior to a bankruptcy proceeding, are not exempt, as they used to be, from being considered a voidable transaction. Again, the court will look at the potential return for all creditors had the property been seized and sold as part of liquidation proceedings.
Funds used in situations where a debtor borrows from one creditor to pay off another creditor are also subject to scrutiny as voidable transactions. For example, if you owe $100,000 to pay for items you purchased, and you quickly borrow $100,000 from somewhere else to pay the corporation you owe, these transactions can be considered voidable. Although many fall under the “earmarking” doctrine, courts have shown that they are increasingly willing to rule these types of transactions as voidable transactions in bankruptcy proceedings to protect the creditors they are representing.

Getting Help

If you are worried about whether a transfer or transaction will be considered a voidable transaction in bankruptcy, consult with an experienced bankruptcy attorney who can help you understand the rules and protect yourself.

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