Chapter 7 Trustee Has Bankruptcy Avoidance Powers

Bankruptcy Avoidance Powers

The chapter 7 bankruptcy trustee is the individual appointed by the Department of Justice to oversee the administration of your chapter 7 bankruptcy case. The trustee’s main duty is to examine the debtor under oath in a section 341 meeting of creditors and determine whether or not there are any assets to be administered for the benefit of creditors. In most chapter 7 bankruptcy cases, there are no assets by which the trustee can administer. This is because the federal law, state of Illinois law and other state exemption laws provide debtors with the ability to protect or shield a specific amount of personal property while going through the bankruptcy process. However, the trustee also has avoidance powers which give him the ability to undo certain transactions or long-arm property back from someone if it was done under two specific scenarios.

 Fraudulent Transfers

The first scenario where a chapter 7 bankruptcy trustee can undo a transaction would be a fraudulent transfer. A fraudulent transfer is one that was made with actual intent to hinder, delay or defraud creditors as found in section 548 of the bankruptcy code. This would be a circumstance where someone for example has a paid-up vehicle worth $20,000 and decides that in anticipation of bankruptcy, he will transfer it to a friend or a family member. He then will file the bankruptcy case and of course doesn’t list the asset since he no longer owns it and may not have listed the transfer if it was beyond a certain timeframe. The trustee in bankruptcy is to examine the debtor and if he believes that the transfer was made fraudulently, the trustee can bring an action to try and recover that vehicle, administer the asset and pay a portion of the proceeds to creditors.

 Transferred For Less Than Fair Market Value

The second scenario where trustee may avoid a transfer is if it was made for less than the fair market value by a debtor who was insolvent at the time of the transfer. So in this example, let’s say the debtor sold the $18,000 vehicle for $4000. He then used the $4000 for living expenses and then decided to file for bankruptcy. The chapter 7 bankruptcy trustee can inquire about when the vehicle was transferred, how much it was transferred for, and then investigate whether or not that transfer was a realistic arms-length transfer or if it was a transfer to avoid paying creditors in a bankruptcy case. The trustee can easily go back to determine what the fair market value of the vehicle was at the time the transfer by using documents and sources such as Kelly Blue Book and the NADA guide. If the trustee is successful, the vehicle must be returned to the bankruptcy estate.

The trustee has the ability to allege both grounds with regard to fraudulent transfers when bringing a complaint. He can allege that the transfer was made with the actual intent to hinder, delay or defraud creditors as well as allege that the transfer was made for less than the reasonably equivalent value by a debtor who is insolvent at the time of the transfer. Both of the code sections under section 548 apply to fraudulent transfers and the trustee’s ability to avoid those transfers.

 Talk With An Attorney Prior To Any Transfer

If you are in debt and considering filing bankruptcy, I would not suggest that you make any transfers whatsoever until you talk to an experienced, bankruptcy attorney. The attorney will be able to advise you as to whether or not the transfer may be deemed fraudulent and as to whether or not the transfer should be done in contemplation of bankruptcy filing. There are other and better ways to protect property and assets in anticipation of a bankruptcy filing. It is perfectly legal to engage in exemption planning so that you can make it through the bankruptcy process unscathed. However, if you start transferring assets to family members or others for less than the fair market value, you run the great risk that the trustee will uncover that transfer, and bring an action to recover the item and bring it back into the bankruptcy estate. Chapter 7 bankruptcy is for honest debtors. The bankruptcy code provides for relief for those who truly need a fresh start and for those that do not have the ability to repay their debt either with wages or with assets. If you make certain transfer actions that attempt to evade the purpose and the structure of the bankruptcy code and the bankruptcy system, you not only run the risk of having that transfer undone but you may be setting yourself up for a denial of discharge complaint. If this were to happen, your entire debt may be determined to be non-dischargeable. This is the most drastic remedy that a bankruptcy judge can render other than bankruptcy crimes and incarceration.

To learn more about your property and as to whether or not that property is protectable in a chapter 7 bankruptcy, contact my office at 847-520-8100. What you do before your case is officially filed and the steps you take with regard to your property is critical. Don’t make the mistake of transferring property out of your name or trading it or selling it for less than its fair market value to anyone.

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