An “Avoidance Action” in bankruptcy is an action to undo (avoid) certain transactions that the debtor engaged in before the bankruptcy. Though Avoidance Actions are not common, they are something to be aware of and to review your case for prior to filing.
The U.S. Bankruptcy Code grants the bankruptcy trustee avoiding powers, which permit the trustee to undo certain transfers of money or property made during a specified period of time before the date the bankruptcy petition is filed. This means the trustee, only with approval from the Bankruptcy Court, can take back certain payments made to creditors or reverse certain transfers of property made before bankruptcy.
What transactions may be subject to an Avoidance Action?
Preferential payments made to creditors over others may be subject to an avoidance action.
- Payments made to creditors within 90 days before filing bankruptcy. 11 U.S.C. § 547(b)(4)(A).
- Totaling over $600, aggregate, to a creditor in the 90 days prior to filing.
- Made while you were insolvent (your debts were higher than your assets); and
- The payment(s) gave the creditor more than it would have otherwise received in a Chapter 7 liquidation case.
- Payments made to “insiders” (relatives, general partners) made within 1 year before filing bankruptcy. 11 U.S.C. § 547(b)(4)(B). The above criteria apply to payments to insiders as well.
- Fraudulent payments made to creditors. 11 U.S.C. 548.
- The trustee is also authorized to avoid transfers under applicable state laws. 11 U.S.C. § 544.
Avoiding powers are designed to prevent unfair payments to one creditor at the expense of all other creditors.
It is the trustee’s burden to demonstrate the statutory elements of a preferential or fraudulent payment. The trustee must file an action with the Bankruptcy Court. Due to the high cost of bankruptcy litigation, most preference avoidance actions are settled before going to trial.
Avoidance Actions in bankruptcy cases are relatively rare. Also, an experienced bankruptcy attorney will analyze the specifics of your case to identify areas of potential conflict prior to filing and the best ways to avoid potential disputes.
If you have made payments to creditors recently, or transferred property in the last few years, you can still explore how filing for bankruptcy can help you. It is important to review your specific situation with a bankruptcy attorney. Perhaps the transactions you made would not pose a problem in your case, or perhaps waiting to file bankruptcy would be a better choice.
If you live in Savannah, GA or the surrounding areas, let’s meet for a free consultation. Together we will review your situation and see if bankruptcy is the right solution to get you out of debt. Please reach out to us at (912) 351-9000 or contact us by filling out this simple web form.
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