A debtor may choose to file a Chapter 7 bankruptcy in order to wipe out their unsecured debt in three to four months. This provides the debtor with a fresh, new start. In a debtor’s Chapter 7 bankruptcy, the debtor’s assigned bankruptcy trustee may “avoid” or “undo” particular transfers of money or property the debtor made prior to the filing of their case. The bankruptcy trustee can avoid a transfer by demanding the return of the transferred property or money from the person or entity to whom the transfer was made.
The rationale for the trustee’s ability to do this, is that one of the goals of bankruptcy is to avoid favoring one creditor over another - all creditors must be treated fairly under bankruptcy law. After a bankruptcy trustee successfully avoids a transfer by taking back the money or property, he or she will use that money to pay the debtor’s other creditors. Fraudulent transfers are a type of avoidance transfer, in which a debtor transfers money or property and does not receive equivalent value in exchange. A preferential payment is another type of avoidable transfer that occurs when a debtor favors paying one creditor over another. This type of avoidance transfer occurs when a debtor makes payments to a creditor in an amount that favors that creditor over the debtor’s other creditors. A Chapter 7 bankruptcy trustee can avoid a preferential payment and distribute the money equitably among the debtor’s creditors. A debtor makes a preferential payment to an ordinary creditor when the debtor pays a total of $600 or more in the three month time period prior to filing for bankruptcy. A debtor can make a preferential payment to a family member or a friend when a payment of $600 or more is made to that person within the one year period prior to filing for bankruptcy. Since this is a broad overview of the two general types of avoidable transfers, a debtor should consult with an experienced bankruptcy attorney prior to filing their case.
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