Avoiding Unnecessary Avoidance in Your Bankruptcy Case

Legal terms can be confusing, and bankruptcy concepts are no exception. Words that may seem like they mean one thing may mean something much more complex. And only by understanding the legal concept can you best protect yourself when going through bankruptcy. 

Consider the concept of avoidance in bankruptcy. While most people think of avoidance as not doing something altogether, it's different in your bankruptcy case. Here's what you need to know about avoidance. 

What Is Avoidance in Bankruptcy?

Bankruptcy avoidance is the trustee's ability to look back at transactions that have already occurred and make them null and void. For instance, if you paid a creditor preferentially — paid them more than they would have been due under Chapter 7 bankruptcy — within a certain time frame in the past, the trustee may be able to void that transaction and demand the money be returned. 

What May Be Avoided?

Bankruptcy trustees are responsible to the court, debtors, and creditors for managing a bankruptcy according to the rules and in the pursuit of a fair outcome for all. However, this can be challenging since the debtor generally doesn't have enough assets to pay everyone they owe in full. So, the law stipulates how creditors may be paid and what types of transactions aren't allowed before and during the bankruptcy. 

Avoiding (or, voiding) past actions is one key way the trustee fulfills their obligations. Some of the most common transactions to be avoided occur when a claimant transfers assets to someone else, such as a friend or family member, preventing these assets from being involved in the bankruptcy liquidation. 

Another common use of this power is to look at past payments to creditors and determine if any of these were preferential and therefore unfair to the other creditors. In many Chapter 7 cases, the trustee can avoid payments made up to 90 days before filing the case.

The trustee is allowed to look back substantially further in some cases. If you paid or transferred assets to certain 'insider' parties (like a partnership in which you participate), the court may look at transactions up to a year earlier. 

Where to Learn More

As you assess what you've done in the months prior to declaring bankruptcy, could any of your transactions be avoided? How can you prevent this from happening? And should you? Find answers to these and other questions by meeting with a firm such as McManus & Associates.

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