Avoidance actions, debtors, or the trustees that represent
them, gain the ability to reject or avoid actions taken with
respect to the debtors property for a specified time prior to
the filing of the bankruptcy. While the details of avoidance
actions are nuanced, there are three general categories of
avoidance actions. Preferences 11.
US C-section 547. Federal fraudulent transfer 11
US C-section 548. Non bankruptcy law creditor 11
USC section 544. All avoidance actions attempt to
limit the risk of the legal system accelerating the
financial demise of a financially unstable debtor who
is not yet declared bankruptcy. The bankruptcy system generally
endeavors to reward creditors who continue to extend financing
the debtors and discourage creditors from accelerating
their debt collection efforts. Avoidance actions are some of
the most obvious of the mechanisms to encourage this
goal. Despite the apparent simplicity
of these rules, a number of exceptions exist in the context
of each category of avoidance action preferences.
Preference actions generally permit the trustee to avoid,
that is, to avoid an otherwise legally binding transaction.
Certain transfers of the Debtors property that benefit creditors
for the transfers occur on or within 90 days of the date of
filing of the bankruptcy petition, for example.
If a debtor has a debt to a friendly creditor and a debt to
an unfriendly creditor and pays the friendly creditor and then
declares bankruptcy one week later, the trustee may be able
to recover the money paid to the friendly creditor under 11 US
C-section 547. While this reach back period
typically extends 90 days backwards from the date of the
bankruptcy, the amount of time is longer in the case of
insiders, typically one year. Insiders include family and
close business contacts of the debtor.
Fraudulent transfer bankruptcy Fraudulent transfer law is
similar in practice to non bankruptcy fraudulent transfer
law. Some terms, however, are more
generous in bankruptcy than they are otherwise.
For instance, the statute of limitations within bankruptcy is
2 years as opposed to a shorter time frame in some non
bankruptcy contexts. Generally, a fraudulent transfer
action operates in much the same way as a preference avoidance
fraudulent transfer actions. However, sometimes require a
showing of intent to shelter the property from a creditor.
Fraudulent transfer may involve an actual or a constructive
fraud. Actual fraud is based upon the
intent of the transfer, whereas constructive fraud may be
inferred based upon economic factors.
Factors that may lead to an inference of fraud include
whether the transfer was for reasonably equivalent value and
whether the debtor was insolvent at the time of the transfer.
The conversion of non exempt assets into exempt assets on the
eve of bankruptcy is not an indicator of fraud per se.
However, depending on the amount of the exemption and the
circumstances surrounding the conversion, a court may find the
conversion to be a fraudulent transfer.
This is especially true when the conversion amounts to nothing
more than a temporary arrangement.
When finding the conversion of non exempt into exempt assets to
be a fraudulent transfer, courts tend to focus on the existence
of an independent reason for the conversion.
For example, if a debtor purchased a residence protected
by a homestead exemption with the intent to reside in such
residence, that would be an allowable conversion into non
exempt property, but where the debtor purchased the residence
with all of their available funds, leaving no money to live
off, that presumed that the conversion was temporary
indicating A fraudulent transfer.
Courts look at the timing of the transfer is the most important
factor. Non bankruptcy law creditor
strong arm. The strong arm avoidance power
stems from 11 US C-section 544 and permits the trustee to
exercise the rights that a debtor in the same situation
would have under the relevant state law.
Specifically, section 544 A grants the trustee the rights of
avoidance of 1A judicial lien creditor, 2 an unsatisfied lien
creditor and 3A bona fide purchaser of real property.
In practice, these avoidance powers often overlap with
preference and fraudulent transfer avoidance powers.
The creditors secured creditors whose security interests
survived the commencement of the case may look to the property
that is the subject of their security interests after
obtaining permission from the court in the form of relief from
the automatic stay. Security interests created by
what are called secured transactions are liens on the
property of a debtor. Unsecured creditors are
generally divided into two classes.
Unsecured priority Creditors and general Unsecured creditors
Unsecured priority creditors are further subdivided into classes
as described in the law. In some cases, the assets of the
estate are insufficient to pay all priority unsecured creditors
in full. In such cases, the general
unsecured creditors receive nothing because of the priority
and rank ordering feature of bankruptcy law.
Debtors sometimes collude with others who may be related to the
debtor to prefer them. By, for example, granting them a
security interest in otherwise unpledged assets.
For this reason, the bankruptcy trustee is permitted to reverse
certain transactions of the debtor within a period of time
prior to the date of the bankruptcy filing.
The time period varies depending on the relationship of the
parties to the debtor and the nature of the transaction.
In Chapter 712 and 13, creditors must file a proof of claim to be
paid in a Chapter 11 case. The creditor is not required to
file a proof of claim. That is, a proof of claim is
deemed filed if the creditors claim is listed on the debtors
bankruptcy schedules unless the claim is scheduled as disputed,
contingent, or unliquidated. If the creditors claim is not
listed on the schedules in a Chapter 11 case, the creditor
must file a proof of claim absolute priority.
A distinctive feature of US bankruptcy law is the Absolute
priority rule. How to fight at 11 US C-section
1129-B2B2. The rule provides that with
respect to a class of unsecured claims, the holder of any claim
or interest that is junior to the claims of such class will
not receive or retain under the plan on account of such junior
claim or interest any property. This requirement means that if
any class of creditors votes against a plan of
reorganization, the bankruptcy court may not confirm the plan
of any class of claims or interest junior to the
dissenting class, for example. Subordinated creditors or
shareholders receives any distribution of the debtors
estate pursuant to the plan. In practice, the rule requires
that debtors satisfy the claims of senior creditors in full
before distributing any estate property to junior creditors or
shareholders under the plan, although senior creditors will
often consent to a de minimis recovery for junior stakeholders
in exchange for their support for the plan.
The Supreme Court has recognized an exception to the absolute
priority rule, known as the new value exception, that allows
junior stakeholders to recover property under a plan over the
objection of senior creditors if the junior stakeholders provide
new value to the restructured enterprise, typically defined as
an upfront monetary contribution to the reorganized debtor that
is commensurate with the property received or retained
under the plan. The basis for the new value
exception is that the holder of a junior claim or interest under
such circumstances does not receive or retain under the plan
on account of such junior claim or interest any property, but
rather receives or retains property under the plan on
account of the new value contribution executory
contracts. The bankruptcy trustee may
reject certain executory contracts and unexpired leases
for bankruptcy purposes. The contract is generally
considered executory when both parties to the contract have not
yet fully performed a material obligation of the contract.
If the trustee or debtor in possession in many Chapter 11
cases rejects a contract, the debtors bankruptcy estate is
subject to ordinary breach of contract damages, but the
damages amount is an obligation and is generally treated as an
unsecured claim committees under some chapters.
Notably, Chapter 79 and 11 committees of various
stakeholders are appointed by the bankruptcy court in Chapter
11 and 9. These committees consist of
entities that hold the seven largest claims of the kinds
represented by the committee. Other committees may also be
appointed by the court. Committees have regular
communications with the debtor and the debtors advisors, and
have access to a wide variety of documents as part of their
functions and responsibilities exempt property.
Although in theory all property of the debtor that is not
excluded from the estate under the Bankruptcy Code becomes
property of the estate, for example, is automatically
transferred from the debtor to the estate at the time of
commencement of a case. An individual debtor, not a
partnership, corporation, etcetera, may claim certain
items of property is exempt, and thereby keep those items
subject, however, to any valid liens or other encumbrances.
An individual debtor may choose between a federal list of
exemptions and a list of exemptions provided by the law
of the state in which the debtor files the bankruptcy case,
unless the state in which the debtor files the bankruptcy case
has enacted legislation prohibiting the debtor from
choosing the exemptions on the federal list, which almost 40
states have done. In states where the debtor is
allowed to choose between the federal and state exemptions,
the debtor has the opportunity to choose the exemptions that
most fully benefit him or her, and in many cases.
May convert at least some of his or her property from non exempt
form, For example, cash to exempt form.
For example, increased equity in a home created by using the cash
to pay down a mortgage prior to filing the bankruptcy case.
The exemption laws vary greatly from state to state.
In some states, exempt property includes equity in a home or
car, tools of the trade, and some personal effects.
In other states, an asset class, such as tools of trade, will not
be exempt by virtue of its class, except to the extent it
is claimed under a more general exemption for personal property.
One major purpose of bankruptcy is to ensure orderly and
reasonable management of debt. Thus, exemptions for personal
effects are thought to prevent punitive seizures of items of
little or no economic value, personal effects, personal care
items, ordinary clothing, since this does not promote any
desirable economic result. Similarly, tools of the trade
may, depending on the available exemptions, be a permitted
exemption as their continued possession allows the insolvent
debtor to move forward into productive work as soon as
possible. The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 place pension plans not
subject to the Employee Retirement Income Security Act
of 1974 ERISA like 457 and 403 B plans.
In the same status as Aresa qualified plans with respect to
having exemption status akin to spendthrift trusts, Sep, IRA's
and SIMPLE still are outside federal protection and must rely
on state law spendthrift trusts. Most states have property laws
that allow a trust agreement to contain a legally enforceable
restriction on the transfer of a beneficial interest in the
trust, sometimes known as an antialionation provision.
The antialionation provision generally prevents creditors of
a beneficiary from acquiring the beneficiary share of the trust.
Such a trust is sometimes called a spendthrift trust to prevent
fraud. Most states allow this
protection only to the extent that the beneficiary did not
transfer property to the trust. Also, such provisions do not
protect cash or other property once it has been transferred
from the trust to the beneficiary.
Under the US Bankruptcy Code, an antialionation provision in a
spendthrift trust is recognized. This means that the beneficiary
share of the trust generally does not become property of the
bankruptcy estate redemption. In a Chapter 7 liquidation case,
an individual debtor may redeem certain tangible personal
property intended primarily for personal, family, or household
views that is encumbered by a lien to qualify the property
generally either a. Must be exempt under section 522
of the Bankruptcy Code or B must have been abandoned by the
trustee under section 554 of the Bankruptcy Code.
To redeem the property, the debtor must pay the lion holder
the full amount of the applicable allowed secured claim
against the property.