How You Can Prevent a Bankruptcy Clawback

The bankruptcy process is intricate and filled with many provisions aimed at making the process fair to all parties involved. In a chapter 7 case, which is a liquidation of the debtor's estate, there is a certain period that a bankruptcy trustee has to examine transactions in order to determine if fraudulent or preferential transfers have occurred.

Period of Limitation

The 180 days prior to the filing of the bankruptcy case is crucial to the estate. Bankruptcy law allows the trustee to determine within that period what can be made part of the debtor's estate. These can include legal settlement awards, bonuses, inheritance, and other assets. All of them will have to become part of the estate so that there is more to divide equitably among creditors.

The bankruptcy trustee also determines if the debtor has made preferential transfers or fraudulent transactions aimed at hiding assets from the bankruptcy court. For instance, 30 days before he filed for bankruptcy, Smith transferred $50,000 to his wife's account. The bankruptcy trustee learns of this transfer and decides that it was an effort at hiding assets from the estate. This is where the trustee can use the clawback provision.

Clawback

Clawback refers to the trustee's power to void or revoke transfers that he deems preferential or fraudulent in nature. Aside from fraudulent transfers, some creditor payments can be considered preferential. Money paid to the creditor can be taken by the trustee and made part of the estate if the payment is deemed preferential.

Preventing Clawback

The best way to avoid the clawback provision is to be honest in dealing with your creditors. The bankruptcy court should be used as a last resort rather than a recourse to discharge some payments. Creditors deserve to be paid because they were able to help you one way or another. It is not their fault that you have poorly managed your finances. Do not attempt to hide your assets because that can result to some repercussions.

Getting Legal Advice

If you are considering a bankruptcy filing, it is best to consult a lawyer before making any payments or before making any transfers. An innocent action may be construed negatively by the bankruptcy trustee. The lawyer can also advice you on how to go about the bankruptcy proceeding in the most expedient manner. The lawyer will also protect your interest and make sure that your future is not jeopardized.