How Might the “Strong-Arm” Powers of the Trustee Affect Your Bankruptcy?

In the weeks and months prior to filing for bankruptcy, debtors may make payments to certain creditors for various reasons. If the bankruptcy trustee — the official who administers the case — concludes that a payment unfairly preferred one creditor over another, the trustee has the power to demand repayment of the money to the bankruptcy estate and use it to pay creditors according to the correct priority. This is known as the “strong-arm” power because the trustee can enforce repayment from creditors.

A pre-bankruptcy payment that unfairly favors one creditor over another is called an avoidable preference. Whether such a payment is voluntary (you write a check to a creditor) or involuntary (a creditor garnishes your wages), the trustee can use the strong-arm power to undo the payment if it took place in either of these circumstances:

• Within 90 days of your bankruptcy filing, if the payment was to a general creditor — For example, you might make a large credit card payment a month before filing bankruptcy with the hope of keeping that card available once the bankruptcy is over. The credit card company is a general creditor, so the trustee could use the strong-arm power to undo this payment.
• Within one year of your bankruptcy filing, if the payment was to an insider — Payments or transfers of property to insiders (family members, business partners or relatives of business partners) can also be grounds for avoidance. A debtor planning on filing for bankruptcy may transfer an asset, such as a stake in a business, to a family member. An asset may be sold to a business associate for much less than it is actually worth. Or a debtor might put their home or other real estate in their child’s name in hopes of keeping it in the family. If these types of transfers occur within a year before filing, the trustee can use the strong-arm power to get the property back.

Trustees can find out about your payment and transfer history by reviewing your statement of financial affairs (SOFA), which is required of all persons filing for bankruptcy. This document requires you to disclose all payments and transfers of property made prior to bankruptcy. If you fail to report them fully, you can be subject to 20 years in prison, fines of up to $250,000 or both. As such, an accurate, truthful SOFA is essential and should be discussed in-depth with your attorney.

If a trustee attempts to use the strong-arm power in your case, you will need an experienced attorney at your side to navigate the complex process. The Law Offices of Michael Jay Berger in Beverly Hills has extensive experience handling avoidances and related proceedings. Call 310-271-6223 or contact me online for a free consultation.