If you’ve recently filed bankruptcy, know someone who has, or are owed money by someone who has, then it pays to be on the lookout for the phenomenon known as the bankruptcy clawback. In rare situations, the normal progression of a bankruptcy proceeding can be dramatically altered if certain circumstances are met, forcing various parties involved in the bankruptcy to relinquish assets that they might have thought were rightfully theirs. To avoid being taken by surprise, one should try to learn as much as one can.
What is a Bankruptcy Clawback?
A bankruptcy clawback typically works by undoing one of two types of past transactions committed by the person filing the bankruptcy. This is usually done because it’s been determined that the transactions in question led to unfair situations regarding the bankruptcy requested by the debtor. The two types of transaction that are subject to clawbacks are fraudulent transactions and preferences.
Fraudulent Transactions
A fraudulent transaction occurs when a person who will later file bankruptcy gives someone a part of his or her assets without receiving fair compensation from that party. If you sell someone a boat of yours at a fair price and use the money to pay off debts, then you wouldn’t have to worry about a clawback. If, however, you gifted your cousin with a whole house immediately prior to filing bankruptcy, then the courts are likely to determine that you should rightfully have leveraged that asset to pay off your debts, and will initiate a “clawback”, taking the house from your cousin.
Preferences
A preference is what happens when the debtor pays off one or his or her creditors immediately prior to filing bankruptcy. Suppose that you owe money to three creditors, but a few weeks before filing bankruptcy, you pay off one of those creditors. While that creditor received full payment on your debt, the other two are going to have to settle with the reduced repayments that come out of your bankruptcy. This puts the first creditor at an unfair advantage, and courts will often overrule such a transaction, reclaiming the money you paid to the first creditor and redistributing it.
Getting Legal Help
Even if you don’t think that you or anyone you know is at risk for suffering a bankruptcy clawback, you can’t be too careful. Any time you’re dealing with bankruptcy issues, always take care to consult the advice and guidance of a qualified attorney with experience in the field.
