Bankruptcy Clawbacks of Preferential & Fraudulent Transfers

The bankruptcy trustee can void preferential or fraudulent transfers of property before you filed. Learn more.

If you pay back preferred creditors or transfer property out of your name prior to filing for bankruptcy, the bankruptcy trustee may be able to void (undo) that transaction and get the property back for the benefit of your unsecured creditors. This is referred to as the bankruptcy "clawback" provision. Read on to learn more about the clawback provision in bankruptcy.

When Can the Bankruptcy Trustee Use the Clawback Provision?

The trustee has the power to void fraudulent or preferential transfers made prior to bankruptcy and recover that money or property for your unsecured creditors.

Preferential Transfers

Preferential transfers include certain payments or transfers of property to creditors made prior to filing for bankruptcy. For example, paying back a loan from your parents just before you file for bankruptcy will typically be considered a preferential transfer. Whether the trustee can void a transfer and claw back the property depends on the value, timing, and recipient of the payment. Here are the rules:

Payments or transfers made within 90 days of bankruptcy.  If, in the 90 days preceding your bankruptcy, you transferred money or property worth over $600 in aggregate to one of your creditors while you were insolvent (meaning you had more debts than assets) and that payment resulted in the creditor getting more than it would have been entitled to through your bankruptcy, it is considered a preferential transfer. In most cases, the trustee doesn’t have to prove your insolvency because bankruptcy law automatically presumes that debtors are insolvent during the 90 days prior to their filing date.

Payments or transfers to insiders.  The same rules discussed above also apply to transfers of money or property to insiders (such as friends, family members, or business partners). However, instead of 90 days, the transfer will be considered preferential even if made within one year prior to your bankruptcy filing date.

Fraudulent Transfers

The trustee can also use the clawback provision to undo fraudulent transfers of property. In general, fraudulent transfers include those made with the intent to hide assets or transfers of property for less than fair market value prior to bankruptcy. The trustee may have grounds to void a transfer and recover the property if:

  • you made the transfer within the two years prior to your bankruptcy or within the time limit allowed by state law for setting aside fraudulent transfers, whichever is greater, and
  • you intended to delay, hinder, or defraud your creditors (actual fraud), or
  • you received less than fair market value for the property transferred while you were insolvent, became insolvent as a result of the transfer, or intended to incur more debt than you could afford to pay back (constructive fraud).

However, if the asset transferred had no equity or would have been exempt, the trustee will typically not void the transfer as fraudulent.

To learn more about how exemptions protect your property in bankruptcy, see our  Bankruptcy Exemptions  topic area.

How to Avoid the Clawback Provision

If you made a transfer that may be considered preferential or fraudulent, you may be able to avoid a clawback of your property by simply delaying your bankruptcy filing and making sure enough time has passed since the transfer.  But be aware that even if you delay your bankruptcy, hiding assets or intentionally committing bankruptcy fraud can result in the loss of your property, your discharge, and even lead to a criminal investigation.

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