What are avoidance powers in bankruptcy?

28 Oct What are avoidance powers in bankruptcy?

Bankruptcy relief accomplishes three main goals: i) for the debtor, provides the necessary “breathing room” to propose a debt adjustment plan or reorganization plan; ii) for the debtor’s creditors, ensuring property of the estate (which includes wages earned post-petition) is distributed in accordance with priorities set forth under the Bankruptcy Code; and iii) preservation and maintenance of estate property.

While in many respects, bankruptcy is safe haven for consumers allowing the debtor to keep certain property necessary for the maintenance and support of themselves and their family, the true essence of bankruptcy is orderly distribution of estate property and preservation of the estate for the benefit of the debtor and the debtors creditors. Once accomplished, the creditors should receive all they could have received had the estate been liquidated (which is sometimes nothing), and the debtor gets a fresh start, such as the Chapter 13 discharge.

A part of the “estate preservation” concept in bankruptcy is the notion that certain transfers of property before a bankruptcy case is filed are subject to the “avoidance powers” of a trustee. These powers are found in Chapter 5 of the Bankruptcy Code (sections 544, 546, 547, 548 and 549). In the hypothetical, the estate representative (typically a trustee – but, in certain circumstances, the debtor) can file a lawsuit to recover property transferred to another entity prior to the filing of the bankruptcy petition or avoid liens that were not property perfected, among other things.

A debtor in chapter 13 also possesses certain “avoidance powers.” However, the Bankruptcy Courts throughout the country are split as to what extent a debtor in a Chapter 13 case can utilize such powers. Some jurisdictions allow the debtor in a Chapter 13 case to exercise all avoidance powers as if the debtor was the trustee. Other Bankruptcy Courts have held that, because the goal of Chapter 13 is debt readjustment, as opposed to recovery of property, the Chapter 13 debtor cannot exercise the trustee avoidance powers (also construing section 1303 of the Bankruptcy Code narrowly as juxtaposed with a comparable provision of Chapter 11, section 1107). Other Bankruptcy Courts still are of the opinion that, as long as the Standing Chapter 13 Trustee signs onto the suit as the plaintiff, the Chapter 13 debtor can sue to avoid certain transfers.

Avoidance powers are significant to Chapter 13 debtors for reasons other than preserving the estate for creditors. Oftentimes, creditors will haphazardly make filings in the public records encumbering the chapter 13 debtor’s property that is otherwise exempt from creditors notwithstanding the bankruptcy filing. To this end, and what has appeared to go unnoticed by the Bankruptcy Courts, are the avoidance provisions of 11 U.S.C. 522(f) (avoidance of liens on the debtor’s personal property that the creditor did not particularly lend the money for); and, in particular, 11 U.S.C. 522(g) & (h), which specifically states that the debtor may utilize the trustee’s avoidance powers if i) the creation of the lien or transfer of the property was involuntary; ii) the trustee does not attempt to avoid the transfer; and iii) the property transferred or the lien created affects the debtor’s exempt property.

So what does this all mean? Well, if the mortgagee did not property prefect its lien upon a debtor’s homestead (to the extent the homestead is exempt under state or federal law) prior to when the Chapter 13 case is filed, the Chapter 13 debtor may be able to avoid it all together. If a credit union empties a Chapter 13 debtor’s bank account within 90 days of filing the Chapter 13 case, the debtor may be able to avoid the transfer and recover the funds (to the extent exempt). If an ex-husband is owed a debt from the chapter 13 debtor (and is not considered alimony or support) and takes off with some of the Chapter 13 debtor’s property, the Chapter 13 debtor may be able to recover the property. If a car is repossessed prior to when the chapter 13 debtor filed his/her case, and title has passed to the lien holder, the debtor may be able to recover the vehicle as an avoidable preferential transfer.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.

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