Commercial Collections Blog

Avoidable Transfer Powers, attention!

The debtor in possession in a bankruptcy filing, or the trustee as the case may be, has so-called avoiding powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the bankruptcy petition is filed. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, and subject to various conditions, the power to avoid transfers is effective against transfers made by the debtor within a specified period before filing the petition. But transfers to “insiders” (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing can be avoided. In addition, under 11 U.S.C. § 544, the trustee is authorized to avoid transfers under applicable state law, which often provides for longer time periods. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors.

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