Bankruptcy Transfers: Preferential vs. Voidable

A bankruptcy trustee can recover assets transferred within one year of the bankruptcy filing where the debtor did not get reasonably equivalent value for the asset, or where the transfer was made with intent to hinder creditors.

Preferential Bankruptcy Transfers

Preferences are transfers of a debtor’s property to a creditor for payment of a prior debt.  Under the Bankruptcy Code, “preferences” are transfers of property of the debtor, which are avoidable or reversible if they are:

  • To or for the benefit of a creditor
  • For or on account of an antecedent debt owed by the debtor before the transfer was made
  • Made while the debtor was insolvent
  • Made within 90 days before the filing of the petition
  • Enables the creditor to receive more than the creditor would have received if the case were filed under Chapter 7

Preference avoidances by bankruptcy trustees are designed to prevent creditors from gaining an advantage over other creditors.

Voidable Transfers

A trustee or a debtor in possession has “avoiding” powers, which may be used to cancel a transfer of money or property made during a certain period of time prior to the filing of the bankruptcy petition.  This “avoidance” of a particular transfer by a trustee, may force the return of the payments or property transferred, for the benefit of all creditors.  The power to avoid transfers is effective against transfers made within 90 days prior to the bankruptcy filing.  If the transfer involved insiders such as relatives, partners, or officers of the debtor, the trustee or debtor in possession may “avoid” or cancel such transfers if they were made up to on year prior to filing for bankruptcy.

Bankruptcy Crimes

Bankruptcy is designed to provide a solution for honest debtors to obtain debt relief and a fresh financial start.  The bankruptcy system requires that all debtors be honest and forthright throughout the entire process.  A bankruptcy crime can be construed as many different offenses, some of which may include:

  • The concealment of property from the Bankruptcy Court or a bankruptcy trustee
  • Knowingly and fraudulently making a false oath or account
  • Knowingly transferring property to defraud creditors
  • Concealing, destroying, mutilating or falsifying records or documents
  • Filing a bankruptcy petition to deceive or deliberately defraud others

Bankruptcy fraud carries a sentence of up to five years in prison, or a fine of up to $250,000, or both under federal law.

Disposable Income in Chapter 12

Chapter 12 bankruptcy is designed specifically for the reorganization of family farms.  It is closely modeled after Chapter 13; however, it has a higher debt ceiling.  It is only available to persons who meet the definition of “family farmer” which may be an individual, partnership, or corporation.  The plan must provide for total repayment of the unsecured debt, or the debtor must agree to contribute all of his disposable income to the payment of these debts.  If the plan does not provide for full repayment of unsecured claims, the debtor must agree to contribute his or her entire disposable income to the payment of this debt during the term of the plan.

Tax Claims

Income tax debts may be eligible for discharge under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged.  Chapter 7 provides for full discharge of allowable debts if they meet the following criteria:

  • The due date for filing a tax return is at least three years ago
  • The tax return was filed at least two years ago
  • The tax assessment is at least 240 days old
  • The tax return was not fraudulent
  • The taxpayer is not guilty of tax evasion

Before a Chapter 7 or Chapter 12 bankruptcy can be granted, the petitioner is required to prove that the four previous tax returns have been filed with the IRS.  They are required to provide a copy of their most recent tax return to the bankruptcy court.

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