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Defining the power to avoid pre-bankruptcy transfers

For companies in Hillsborough County that are struggling with debt, bankruptcy may quickly become their most viable option for staying in business while also satisfying their creditors. However, such action is by no means a guaranteed pathway to financial stability. Many business bankruptcy debtors make missteps along the way that hinder their chances of successfully reorganizing.

For example, should a company that hoped to continue to its operations choose to make a large payment to a certain creditor that it anticipated continuing doing business with, such an action may be viewed as prejudicial to other creditors. This could impact their willingness to work with that debtor should it then file for bankruptcy and attempt to formulate a reorganization plan. However, according to the website for the United States Courts, the trustee or a Chapter 11 case (or the debtor in possession) has the power to “avoid” such prepetition transfers. By doing so, it cancels the transaction and requires the recipient to return whatever payment or property it received. Typically, the trustee can exercise this authority with any transactions that occurred within 90 days prior to the debtor filing for bankruptcy.

The timeframe in which pre-bankruptcy transfers can be avoided can be extended in certain situations. These include cases where a debtor may have made a transfer to a party considered to be an “insider.” Section 101 of the U.S. Bankruptcy Code defines insiders to be:

  •          Relatives, general partnerships, or corporations that the debtor directs if the debtor is an individual.
  •          Corporate directors, officers, or partners if the debtor is a corporation.
  •          Managing agents or affiliates if the debtor is a municipality.

Should a transfer be made to any of these parties, the time to avoid it may extended up to a year. 

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