by Adam Mack, J.D.
What Types of Transactions Can Be Reversed in a Bankruptcy Proceeding?
In a bankruptcy proceeding, one of the things scrutinized is the debtor’s previous financial transactions with other people, especially transfers to creditors. In a separate article, we discussed who insiders are and why they are particularly scrutinized.
However, the nature of the financial transaction is as important as who the people involved are. Generally speaking, there are two types of transactions: the “avoidable transfer”and the “transfer for new value.”
The Two Types of Transfers:
The avoidable transfer is a payment to a creditor for an antecedent debt (meaning a debt incurred before the bankruptcy proceeding). The reason it’s “avoidable” is that it can be voided; that is, it can be reversed so that the creditor has to give the money back to the trustee. The trustee then pools that money into the bankruptcy estate for fair distribution among all the creditors. An example of an avoidable transfer (one that can be reversed) is a payment made on a car loan.
The transfer for new value is a payment made to someone else for “contemporaneous exchange for new value,” meaning something paid for in full at the time of the transaction. Essentially, it’s a transaction that does not go toward paying a debt. An example of a transfer for new value is a payment made to a grocery store for food. That type of financial transaction most likely cannot be reversed.
How Insiders Are Affected:
So what happens when a payment is made to an insider?
If it’s an avoidable transfer (payment for a debt incurred before the bankruptcy), then the insider will most likely have to pay that money to the bankruptcy estate. For example, if a debtor’s brother lent her some money and she’s repaying him, then those repayments are avoidable and will most likely need to be returned to the bankruptcy estate.
However, if it’s a transfer for new value, then the insider will most likely be able to keep the money they’ve been paid. For example, if a debtor lives with his parents and is paying them rent, that is usually considered a transfer for new value and his parents will most likely not have to return the money to the bankruptcy estate.
Like other parts of bankruptcy law, the decision whether a certain transaction is an “avoidable transfer” or a “transfer for new value” depends on the facts of the transaction, and so it is important that you speak to an attorney to know if your transactions are avoidable or not and how to best approach your bankruptcy.
These articles are for general informational use and do not constitute legal advice. Since laws change over time, it’s possible some articles are out of date and for that reason, we make no representation that the articles are fully accurate. For actual, up-to-date legal advice (including a free consultation), please contact us!