01 Aug If the Trustee Recovers a Transfer I Made, Can I Keep It?
A bankruptcy trustee can unwind transfers you make before bankruptcy and get property for the estate. And you can exempt property from the estate for your own use. So does that mean you can exempt and keep things the trustee recovers?
That can depend on whether you gave the property away voluntarily or not. For example, if your wages or bank account were garnished just before bankruptcy, your trustee may try to get back the money taken as preferences. Assuming you did not consent to a garnishment somehow, you might be entitled to exempt part of the recovered money. In certain circumstances, the bankruptcy law even allows you to exercise the trustee’s power to recover these payments in order to maximize your exemptions.
On the other hand, if you voluntarily gave property away or transferred it to pay back a debt, bankruptcy law limits your options. The trustee may be able to get the money or property back but it will be used to repay creditors of your estate, not to help you with your fresh start. You cannot claim an exemption in something you willingly gave up to someone else before filing a case.
This makes a degree of sense. Exemptions are meant to protect property you need to start over, not to deny creditors from being paid back out of something you previously gave up. And the “avoidance” powers given to a trustee are largely meant to assure that creditors are treated equally not just during a bankruptcy but in the period prior to it. They are usually not meant to help a debtor get back on her feet, unless creditors had stripped the debtor of such exempt assets just prior to the case. And finally the law avoids rewarding folks who, on the eve of bankruptcy, give away things and do not receive an equivalent value in goods or services.
These rules encourage folks who are in financial trouble to hang onto their property and money and only give them up dearly, usually for the best possible price. Ultimately this is often the best strategy for the debtor over the long run, too.
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