Understanding The Bankruptcy Trustee's Unique Powers

Posted on: 28 January 2016

There are two main goals in any bankruptcy proceeding filed by an individual. The first is to provide debt relief to a struggling consumer whose misfortunes have made him or her unable to repay a debt. The second is to make sure that all of the debtor's creditors are treated fairly and that no one creditor receives special treatment. In order to make sure that all creditors are treated equally, the law gives bankruptcy trustees some unusual powers that you should understand before you file.

The Clawback Provision

Your bankruptcy trustee will examine the payments that you have made in the past year to your creditors. The trustee looks for any unusually large payments, especially

  • within the last year, if made to a close relative, long-term friend, or regular business associate,

  • within the last 90 days if made to any other type of creditor (such as a bank or credit card company).

These are considered preferential payments, because they are benefiting one creditor at the expense of the others.

Usually, debtors get into trouble with this rule because they are attempting to clear off one credit card in hopes of keeping it active after the bankruptcy so that they can maintain access to credit and more easily rebuild their credit scores. Another common problem is when debtors try to repay family member or friends who have helped them out financially during the last few months before they finally decide to file bankruptcy. For example, if your brother gave you money to pay your rent for a couple months, you might be trying to pay him back before your money gets tied up in bankruptcy.

The bankruptcy trustee has the power to "clawback" those payments through a court order. That can be an unpleasant event, especially if the person who received the preferential payment happens to be a friend or relative.

Strong-Arm Statutes

Sometimes creditors will get the idea to try to grab an unfair share of someone's assets by putting a quick lien on the debtor's house, car, boat, or other property. They may even attempt to push through a foreclosure. In those situations, it's important to bring it to the attention of the bankruptcy trustee as soon as possible. Through what's known as a strong-arm statute, a bankruptcy trustee has the ability to step into the shoes of a creditor and void the transfer of any property or cancel the lien. If done in time, this can effectively cancel the ability of a company to try to foreclose on any property you own by keeping it from perfecting, or being legally filed and recorded.

It's important to note, however, that the trustee can also use this power to undo the transfer of property or other assets that you willingly conveyed to someone else. Usually, the trustee will only take this step if he or she feels like the transfer was a fraudulent conveyance–one that was designed to hide your assets from your creditors.

For example, if you owned a classic car that you always intended to give to your son at some point and decided to transfer it into his name prior to the bankruptcy, the trustee could very well decide that it was an attempt to keep the car from being used as a saleable asset to repay your debts and void the transfer.

State laws vary on how far back a trustee will examine your records for issues like these. It's very important that you discuss the situation with your attorney and determine if you've made any payments or conveyances that would attract the trustee's attention within the time frame designated by your state. If you have, and you want to avoid complications, it may be necessary to delay your bankruptcy for a while.

For more information on what legal authority a trustee has during the bankruptcy proceedings, contact an attorney near you.