What Does ‘Clawback’ Mean in a Bankruptcy?
Just before filing bankruptcy, if a debtor decides to transfer title of an asset, like a house or a business, the asset may be returned to the debtor’s estate under the clawback provision in bankruptcy law. In some situations, the bankruptcy trustee appointed to manage the debtor’s financial affairs can recover those pre-bankruptcy assets from individuals or companies who received them.
In bankruptcy, the clawback provision entitles bankruptcy trustees the ability to look at financial transactions the debtor made before filing bankruptcy to determine if he/she improperly transferred or gave away property that should be part of the bankruptcy estate. If the trustee finds that the debtor did give away or transfer property or funds inappropriately, then the trustee can “claw it back” by undoing the transaction and bringing that property into the estate. Any property that does not qualify under a valid bankruptcy exemption may be sold to pay back creditors.
What Transactions are Subject to “Clawback”?
Under the bankruptcy law, transactions subject to clawback are those considered to be preferential or fraudulent transfers of property or funds made prior to the filing of a bankruptcy. Whether or not a transaction is subject to the clawback provision depends upon several factors, including:
Certain payments or transfers of property made before filing for bankruptcy are considered preferential transfers. For example, if the debtor decides to pay back a $2,000 loan from his uncle six weeks before he files a petition for bankruptcy, that payment would typically be considered a preferential transfer. Whether or not the bankruptcy trustee can void the transfer will depend on the timing, the amount or value of the transfer, and to whom the payment was made.
Payments or Transfers Within 90 days of Bankruptcy
If transfers of assets or payment of funds are made within 90 days of filing bankruptcy, these transactions could be clawed back and returned to the debtor’s estate to be split among all creditors.
Fraudulent Transfers to Insiders Within 1 Year of Bankruptcy
Sometimes debtors attempt to transfer property or funds to family members or those considered “insiders” intending to keep the property “safe” until the bankruptcy case is over. Once the case is over, the bankruptcy filer thinks he/she will get the property back from the insider. Transfers to insiders may be considered fraudulent and the bankruptcy trustee can undo the payment or transfer and place the asset back into the bankruptcy estate. There is also the risk of having the entire bankruptcy case thrown out of court if the trustee believes the person filing bankruptcy was trying to trick the court by hiding assets from the bankruptcy.
Can You Avoid the Clawback Provision?
If your client or customer is having financial difficulties, try to keep informed about their situation, and be ready to consult with a bankruptcy attorney. Timing could impact your ability to be paid from the bankruptcy estate, regardless of whether you will be subject to clawback provisions, and you may need a professional to help you fight for your share of compensation.
Consult a Philadelphia Bankruptcy Lawyer Today
Bankruptcy laws are complex. Both debtors and creditors should seek advice from an experienced bankruptcy attorney to ensure they get the best result from a bankruptcy filing.
The attorneys at Alfred Abel Law Offices serve both individuals and businesses in bankruptcy proceedings in the Philadelphia area. If you need advice from a highly regarded and experienced bankruptcy attorney or wonder if you may be subject to clawback in a bankruptcy case, contact us today for a consultation.