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The bankruptcy process
Avoidance powers
In bankruptcy, avoidance powers, which the federal courts also call avoiding powers, are a trustee's powers to undo certain transfers of a debtor's property and recover the money or property for the estate. 1
Talk to a lawyerHow it works
Each power reaches a different kind of transfer, as the table shows, and each has conditions set by the Bankruptcy Code. 1 2
There is a time limit. A trustee's suit to avoid a preference or a fraudulent transfer generally must be started within 2 years after the case begins, or 1 year after the first trustee is appointed if that is later, and in any event before the case is closed or dismissed. 3
For a person filing, the practical point is disclosure. At the meeting of creditors the debtor answers questions under oath about the bankruptcy paperwork, property and debts. 4
What it covers
| Power | What it reaches |
|---|---|
| Preferences 2 | Payments to a creditor in the 90 days before filing, or within one year for an insider, that give it more than it would get in a Chapter 7 liquidation 2 |
| Fraudulent transfers 2 | Transfers within 2 years before filing made with intent to defraud, or for less than reasonably equivalent value 2 |
| Unperfected interests 1 | Security interests and other transfers not properly perfected under nonbankruptcy law when the case began 1 |
| Statutory liens 5 | Certain liens that arise by statute, such as one that first takes effect when the case is filed, or a lien for rent 5 |
| Transfers after filing 6 | Transfers of estate property after the case begins that the law or the court did not authorize 6 |
Common questions
I repaid a debt shortly before filing. Is that a problem?
It can be. A payment to a creditor in the 90 days before filing, or within one year if the creditor was an insider, may be a preference that can be avoided and recovered. Whether that applies depends on the facts, so raise it with a bankruptcy lawyer before you file. 2
Sources
- Chapter 7 - Bankruptcy Basics (uscourts.gov)
- Glossary of Legal Terms (uscourts.gov)
- 11 U.S. Code § 546, Limitations on avoiding powers (law.cornell.edu)
- U.S. Trustee Program: Section 341 Meeting of Creditors
- 11 U.S. Code § 545 - Statutory liens (Cornell LII)
- 11 U.S. Code § 549, Postpetition transactions (law.cornell.edu)
- 11 U.S. Code § 522(f)(1) (Cornell LII)
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