17 Jul Bankruptcy trustees can unwind transfers
Chapter 7 bankruptcy trustees not only succeed to the debtor’s non exempt assets at filing, but have the power to recover assets transferred to others before the bankruptcy case was filed. These powers are collectively called the “avoiding powers.”
Preferences are transfers of the debtor’s assets on account of existing debts, made within 90 days of the filing, that allow a creditor to get more than they would have gotten had the transfer not been made and the claim filed in the bankruptcy case. A classic case of a preference is a bank levy by an non tax creditor.
Fraudulent transfers are subject to avoidance. The Bankruptcy Code has a “look back” period for fraudulent transfers; the trustee also gets the benefit of state law statutes on fraudulent transfers. In California, that look back period is four years.
The trustee is also deemed, by provision of the Bankruptcy Code, to be a bona fide purchaser for value (a BFP) as to real estate. That permits the trustee to avoid liens or other interests in real estate that aren’t part of the public record or obvious to a stranger interested in buying the property.
There are other, less used avoiding powers available to the trustee including whatever rights a creditor with a judgment has under the state law in the forum court.
The debtor’s bankruptcy estate, then, is comprised not only of the assets the debtor owns as of the filing, but also whatever property the trustee can recover using the avoiding powers.
It is the operation of these avoiding powers that take a bankruptcy filing out of the realm of “just filling out forms”, as the non lawyer petition preparation services describe bankruptcy, and make doing it yourself dangerous.
Cathy Moran, Esq.
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