The theory behind granting the trustee the legal right to avoid such transfers is that the wrongful transfer deprived creditors an opportunity to receive more money than they would have otherwise received had the transfer not occurred. Accordingly, any money recovered by the chapter 7 trustee from such an avoidance will be distributed to the debtor’s other creditors. The two basic types of avoidable transfers are fraudulent transfers and preferential payments.
A fraudulent transfer occurs when the debtor transfers money or property to another, prior to filing their bankruptcy case, and receives less than equivalent value in exchange for the transfer. Section 548 of the Bankruptcy Code provides that the trustee can avoid any such transfer that occurs within the two year period prior to the date that the bankruptcy case is filed. An example would be selling your truck worth $10,000 to your friend for $2,000 (or worse giving to him for free), 6 months before filing bankruptcy.
The trustee would be able to avoid this transfer by legally pursuing the $8,000 extra dollars the friend should have paid for the truck, with the theory being that the extra money would have been available to pay the debtor’s other creditors. Keep in mind, the transfer will be considered fraudulent, and avoidable, regardless of whether the debtor actually intended to transfer the property in order to defraud, or avoid their obligation, to the creditors.
However, if it could be proven that the debtor did, in fact, transfer the property with the actual intend to defraud, or harm, their creditors, the Court could deny or revoke the debtor’s right to discharge their debts, particularly if the transfer occurred within the one year period prior to their case being filed.
Although the look-back period for avoiding transfers is 2 years prior to the date the bankruptcy case is filed under the Bankruptcy Code, Minnesota Statues Section 513.44 actually provides a 6 year look-back for such transfers. The requirements for a fraudulent transfer under this Statute are similar to Section 548 of the Bankruptcy Code. A fraudulent transfer pursuant to this Statute can be found when the debtor transfers property for less than equivalent value, and essentially, it leaves them in a position in which they are left with substantially less property or without any reasonable ability to repay their debts.
This is true regardless of any intent that the debtor has to defraud creditors. Also, the Statute provides that a fraudulent transfer occurs when the debtor actually intends to defraud their creditors and provides certain factors the court can look at to prove intent. These factors include, whether the property was transferred to a family member of the debtor, whether the debtor was insolvent (the value of their assets were less than their debts) around the time of the transfer, whether the debtor was sued or threatened with legal action shortly before the transfer was made, whether the transfer was substantially all of the debtor’s assets, etc.
Commonly, chapter 7 trustees use the State Statue in situations in which the debtor transferred property to family members, for less than equivalent value, more than 2 years prior to filing bankruptcy.
Another type of avoidable transfer is known as a preferential payment, which is governed by Section 547 of the Bankruptcy Code. A preferential payment occurs when the debtor, prior to filing their bankruptcy case, makes payments to any creditor in an amount that unfairly benefits that creditor in relation to the other creditors. When the creditor is an ordinary creditor (i.e. doesn’t have a special relationship with the debtor), a preferential payment occurs when that creditor receives a total of over $600 in the 90 period prior to the filing of the bankruptcy case, whether received in one payment or in multiple payments.
When the creditor has a special relationship with the debtor, such as a family member or business associate (aka an “insider”), the look back period is 1 year prior to the date the bankruptcy case is filed. As with ordinary creditors, the total amount paid to the insider during this period must be over $600 for the chapter 7 trustee to be able to avoid the transfer.
Just like with a fraudulent transfer, the chapter 7 trustee, may avoid a preferential payment to recover the additional money received by the creditor and distribute the funds more equitably among the other creditors.
There are certain legal defenses to a preferential payment such when the transfer was done in the “ordinary course of business” or when the transfer was a “contemporaneous exchange” for goods or services. If the debtor regularly engaged in making such payments to the creditor, the transfer may not be avoidable as the transfer(s) were made in the ordinary course of business.
Also, if the debtor made the payment directly in exchange for a good or service offered by a creditor (as opposed to paying on an old debt), such payment would likely not be avoidable. It is more likely that the trustee would be able to avoid a payment made on an old debt that is not made in the ordinary course of business.
An example would be where a debtor’s father loans the debtor $2,000 a couple years before the date of the debtor’s bankruptcy filing for car repairs, and the debtor then repays the father the $2,000 out of their tax refund, a few months before filing for bankruptcy. Since the payment to the father was not something the debtor regularly did in the ordinary course of business, and was on an old debt the repayment, it would likely be considered an avoidable preferential payment.
This is a generalized overview of avoidable transfers. The law on these types of transfers is extensive and complicated. A person considering filing for bankruptcy should first consult with an experienced bankruptcy attorney to ensure they are aware and prepared to best handle any such avoidable transfer situations and to ensure that they protect as much as their property, as possible, during the chapter 7 bankruptcy process. See us at LifeBackLaw.com
Understanding avoidable transfers is crucial for debtors contemplating bankruptcy. Here’s what you should know:
Transparency is Key: Be upfront with your bankruptcy attorney about any transfers you’ve made recently. Hiding transfers can lead to serious consequences, including dismissal of your case or even criminal charges.
Timing Matters: If you’re considering bankruptcy, avoid making significant transfers of money or property, especially to family members or insiders. The closer a transfer is to your bankruptcy filing, the more likely it is to be scrutinized. The timing of these transfers in relation to the filing of the bankruptcy petition is critical, as it can affect the determination of preferential transfers and the avoidance of certain asset transfers.
Seek Professional Advice: Consult with an experienced bankruptcy attorney before making any major financial decisions. They can help you assess the potential risks and advise you on the best course of action.
If you’re a creditor who received a transfer that the trustee seeks to avoid, you may have defenses available. Some common defenses include:
Good Faith: If you received the transfer in good faith, for value, and without knowledge of the debtor’s financial problems, you may be able to defend against the trustee’s claim.
Ordinary Course of Business: If the transfer was made in the ordinary course of business and according to ordinary business terms, it may not be avoidable.
Contemporaneous Exchange: If you provided goods or services in exchange for the transfer at the time of the transfer, it may not be considered a preference. A contemporaneous exchange for new value can also be a defense against avoidance actions involving antecedent debt owed, as it demonstrates that the transfer was not for an antecedent debt but for new value given at the time of the transfer.
The bankruptcy trustee plays a critical role in identifying and recovering avoidable transfers. In bankruptcy court, they have a duty to investigate the debtor’s financial transactions and maximize the assets available for distribution to creditors.
By diligently pursuing avoidable transfers, the trustee ensures that all creditors are treated fairly and that the bankruptcy system functions as intended.
Whether you’re a debtor or a creditor, understanding avoidable transfers is crucial in the bankruptcy process. If you have questions or concerns about avoidable transfers, it’s essential to seek guidance from a qualified bankruptcy attorney. Protecting the interests of the debtor's creditors is vital to ensure that any avoidance actions benefit the entire estate, not just the debtor.
LifeBack Law has a team of experienced bankruptcy attorneys who can help you navigate the complexities of avoidable transfers. We can help you understand your rights, protect your interests, and achieve the best possible outcome in your case. Contact us today for a free consultation.
If you’re considering bankruptcy, here are some practical tips to avoid potential problems with avoidable transfers:
Document Everything: Keep detailed records of all financial transactions, including invoices, receipts, and contracts. This will help you demonstrate the legitimacy of any transfers and defend against potential challenges. Maintaining detailed records is crucial to protect the debtor's estate and ensure that all transactions can be justified.
Avoid Preferential Treatment: Treat all creditors fairly and avoid favoring any particular creditor in the months leading up to your bankruptcy filing.
Time Payments Carefully: If possible, avoid making large payments to creditors shortly before filing for bankruptcy. Consider spreading out payments over time or negotiating alternative arrangements.
Consult with an Attorney Early: Seek guidance from a bankruptcy attorney as early as possible in the process. They can help you assess your financial situation, identify potential risks, and develop a strategy to protect your assets.
The consequences of avoidable transfers can be severe for both debtors and creditors.
For Debtors:
Loss of Assets: The trustee can recover the transferred property, reducing the assets available to repay other creditors.
Denial of Discharge: In cases of fraudulent transfers, the court may deny the debtor’s discharge, meaning their debts won’t be wiped out.
Criminal Charges: In extreme cases, fraudulent transfers can lead to criminal charges.
Impact on Legal or Equitable Interests: Avoidable transfers can affect the debtor's legal or equitable interests in property, as the trustee can void certain transfers to ensure equitable distribution to creditors.
For Creditors:
Repayment Obligation: Creditors who received avoidable transfers may be required to return the property or its value to the bankruptcy estate.
Litigation: Creditors may face litigation from the trustee to recover the transferred property.
To better understand avoidable transfers, consider these examples:
Example 1: A debtor sells their luxury car to a family member for a fraction of its value shortly before filing for bankruptcy. This could be considered a fraudulent transfer.
Example 2: A debtor pays off a large credit card bill owed to a friend in full a few weeks before filing for bankruptcy, while leaving other debts unpaid. This could be considered a preferential payment. The trustee might pursue a preference claim in this scenario to recover the payment as it benefits the estate and meets the criteria of an avoidable transfer.
While the Bankruptcy Code provides the overarching framework for avoidable transfers, state laws can also play a role. Some states have their own fraudulent transfer laws with different look-back periods or additional grounds for avoidance. These state laws can significantly impact the rights of an unsecured creditor, particularly in determining the validity of transactions and the potential for recovery in bankruptcy cases. It’s crucial to consult with an attorney familiar with both federal and state laws to assess your specific situation.
In bankruptcy, certain property is exempt from creditors’ claims. Exemptions can protect assets like your home, car, or retirement accounts. However, even exempt property could be at risk if it was acquired through an avoidable transfer. Exemptions can impact the recovery of assets for unsecured creditors, as transfers made to them may be subject to avoidance and recovery under 11 U.S.C. §547(b). If you used funds from a fraudulent transfer to purchase a home within the look-back period, the trustee might be able to recover the property or its value.
Avoidable transfer issues can be complex and highly fact-specific. An experienced bankruptcy attorney can guide you through the process, protect your interests, and ensure compliance with the law.
An attorney can help you:
Assess the risk of avoidable transfer actions
Develop a strategy to protect your assets
Negotiate with the trustee
Defend against avoidance actions
Defend against preference claims, which are critical in bankruptcy proceedings to avoid certain transfers as preferential payments
Ensure you receive the maximum benefits available under the law
By understanding avoidable transfers and seeking professional guidance, you can confidently navigate the bankruptcy process and protect your financial future.
Navigating the complexities of bankruptcy law can be overwhelming. That's why it's crucial to have a knowledgeable and experienced attorney by your side. At LifeBack Law, we specialize in helping individuals and businesses through the bankruptcy process.
Our team of dedicated attorneys can help you understand your options, protect your rights, and achieve the best possible outcome in your case. Contact us today for a free consultation and let us help you get your financial life back on track.
Disclaimer: This blog post is intended for informational purposes only and should not be construed as legal advice. If you have questions or concerns about avoidable transfers or bankruptcy, please consult a qualified attorney.