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What are ‘avoidance powers’?

| Apr 14, 2017 | Bankruptcy, Bankruptcy |

Many people don’t realize this, but from the moment that you file your bankruptcy, the trustee assigned to your case has the status and power of a creditor — but not just any ordinary creditor.

Your trustee is treated as a creditor with some unusual abilities known as “avoidance powers.” Learn more about what this means and how it can affect your case.

1. What is an avoidance action?

An avoidance action means that your trustee is flexing his or her financial muscles in order to undo a previously done transaction. It could be something like an overly large payment on a credit card that you made hoping to keep that card available and open once your bankruptcy was over. A payment that favors one creditor over another isn’t permitted.

It could also be a much more complex issue. For example, if you sold the family business to your brother for much less than it is actually worth or gave your son your Harley-Davidson motorcycle, the court may suspect you of a fraudulent conveyance. That’s essentially trying to hide your assets from your creditors. In those situations, the trustee has the power to undo the transfer or sale and use the assets as a way to pay back some of what you owe to creditors.

2. What are strong-arm statutes?

These are the specific laws that allow your bankruptcy trustee to stop a creditor from grabbing an unfair share of the assets that are available by putting a quick lien on your property — whether it’s your house, a boat or your business. If the lien isn’t “perfected” by being properly recorded prior to the bankruptcy petition, your trustee can step in and void the lien.

Similarly, your trustee can void something like a second mortgage on your property under the same sort of conditions.

Strong-arm statutes and avoidance powers are designed to make the bankruptcy process as fair to you and your creditors as possible. Sometimes you may benefit from their use (like when a second or third mortgage is voided) as much as your creditors.

If you need more specific information about how avoidance powers and strong arm clauses work during bankruptcy, talk to an attorney today.

Source: Offices of United States Attorneys, “57. Avoidance Powers — Strong-Arm Clause Fraudulent Conveyances,” accessed April 14, 2017

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