Madoff bankruptcy: What’s a claw-back? Are you at risk?

23 Mar Madoff bankruptcy: What’s a claw-back? Are you at risk?

You’ve heard of the Bernard Madoff fraud.  People have lost millions.  And now to add insult to injury, the Madoff bankruptcy trustee says he intends to sue people who got money back from Madoff.  

The press is calling this a “claw-back.”

What is a “claw-back” and how might it affect you?

The bankruptcy trustee of any debtor, rich or not so rich, has the right to “avoid” or undo certain transactions.  The two most common types of transactions are those deemed to be a “fraudulent transfer” or those deemed a “preference.”

A fraudulent transfer typically is one where the person who gets something did not give something of reasonably equal value for it.  For example, the debtor gave something away a diamond ring to his girl-friend at a time when he was broke.  That diamond ring or its value could have been used to pay some of his debts.

A preference happens when the person pays someone near the time of the bankruptcy case, leaving the person paid better off than others in the bankruptcy.  The trustee can look back 90 days for most people who get paid and up to a year for family members or other insiders who got paid.  This law allows people to be treated equally in bankruptcy.

If you received a preference or a fraudulent transfer, you can expect that the bankruptcy trustee will find out.  He will sue you to recover that transfer or “claw it back” from you for the benefit of creditors.  Of course if that happens, you have a claim against the bankruptcy estate so at least you’ll have a chance to get your fair share if you were a creditor.  If you received a fraudulent transfer and have to give it back, you’re out of luck.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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