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What’s the bankruptcy “clawback” provision?

| Oct 8, 2020 | Uncategorized

Your debts have become overwhelming, and you’ve accepted the fact that you can’t repay them. Bankruptcy really is your best option.

Some of those debts, however, weigh heavier on your mind than others. For example, maybe you borrowed money from your best friend to try to keep your business afloat earlier this year. Maybe your parents loaned you some money to catch up your mortgage that you haven’t been able to repay. You would much rather pay off those debts, even though you can’t pay others.

Don’t do it. Under Bankruptcy Code 11 U.S.C. § 547, you aren’t permitted to show preference to one creditor over another. The bankruptcy trustee will be looking at your financial records to see if you made any unusual transfers of money or property in the 90 days prior to when your bankruptcy petition was filed. If they detect any, the trustee has the legal right to “claw back” that money in a lawsuit against your creditor.

How much is considered “too much” and preferential treatment of a debt? If your debt is primarily consumer debt, just $600 or more will attract the trustee’s attention. If your debt is not primarily consumer best, anything over $6,825 will do it. The rule is partially to ensure that all creditors get a fair shot at whatever assets you have to divide and partially to prevent people from hiding assets from the court simply by passing them off to family or friends for a while.

So what should you do if you have concerns about a debt that is both financial and emotional? Talk to your attorney. You can discuss your options, and that may make it easier to decide what steps to take next.

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