Bankruptcy Tactics to Avoid Clawback

Chapter 11 Bankruptcy can be a valuable tool for businesses that need to restructure their operations or create new debt repayment schedules. However, the life of a business owner can take on new complications after he or she files the initial petition for bankruptcy. While Chapter 11 is typically used to address debts that existed prior to filing, the bankruptcy trustee can investigate certain transactions that were made within a certain timeframe of the filing.

If the bankruptcy trustee determines that a transaction within a certain timeframe was made for an improper purpose, then the trustee can use the powers vested in them by the bankruptcy court to retroactively cancel, or avoid, that transaction. This will require the bankruptcy trustee to file motions with the bankruptcy court that bring in third parties to the bankruptcy proceedings, and these third parties will typically hire attorneys to avoid returning the money that was transferred to them. In other words, this power to cancel transactions can cause significant delays and complications in a bankruptcy proceeding.

In this course, we explore the extent of a trustee’s ability to avoid—often affectionately referred to as clawback—a bankruptcy petitioner’s past transactions. This involves an analysis of the timeframes involved, the parties involved, and the amounts of money involved. Finally, we conclude by providing an overview of possible defenses a bankruptcy petitioner can use to prevent the trustee from implementing his or her clawback powers.