Shenwick & Associates has filed numerous bankruptcy petitions for businesses (LLCs and Corporations) in the Southern District of New York and the Eastern District of New York. We have recently observed a trend where Chapter 7 Bankruptcy Trustees are conducting a "deeper dive" into business finances to initiate avoidance actions (Preference or Fraudulent Conveyance) against business owners or third parties.
The Bankruptcy Trustee and their counsel get compensated for bringing these transactions.
These actions are permissible under the Bankruptcy Code; however, they can be time-consuming and expensive to defend or settle.
Additionally, once a Chapter 7 bankruptcy case is filed, dismissal can be difficult. After the business files for Chapter 7 Bankruptcy, the Bankruptcy Trustee assigned to the case will request bank statements, tax returns, credit card statements, and other financial documents for the business. These will be reviewed by the Bankruptcy Trustee, their counsel, or their accountant.
Transactions which will be heavily scrutinized include but are not limited to:
1 Preference payments. Payments or transfers made to creditors within 90 days before filing (or within one year if to an insider, such as a family member or business partner) that give one creditor more than others. The trustee can “claw back” these payments to ensure equal treatment among creditors
2 Fraudulent Conveyances Transfers of property or assets made with intent to hinder, delay, or defraud creditors, or made for less than reasonably equivalent value, typically within two years prior to filing (sometimes longer under state law). The trustee can reverse these to recover assets for the bankruptcy estate (“Sweetheart deals to 3rd parties or owner of the business and their friends or family
3 Personal expenses of Owner of business paid by Business such as insurance, car payments, meals or vacations
4 Gifts or large transfers to friends/family: Any significant gifts or transfers of value, especially to insiders, are closely examined and can be reversed if deemed improper.
5 Sales of assets for less than fair market value: The trustee looks for any sales or transfers where the business did not receive fair value, as these may be considered fraudulent.
6 Unusual or inconsistent transactions: Any financial activity that appears out of the ordinary, such as sudden depletion of assets, hidden accounts, or unreported income, will be investigated
7 Undervalued transactions: Transfers where the debtor sold or gave away property for less than its fair market value within a set period before bankruptcy (often up to five years). For example, selling a car to a relative for a nominal amount can be voided
8 Transfers to defeat creditors: Any transfer made with the intent to hinder, delay, or defraud creditors—such as moving assets to a family member or friend to keep them out of the bankruptcy estate
9 Transactions where consideration is given to a third party: If the debtor transfers property to one person but the payment or benefit goes to someone else, this can be voided to prevent circumvention of bankruptcy rules
10 Sales or transfers of assets to insiders, officers, family members, or other businesses under common control
These are some transactions that will be scrutinized; if similar transactions occurred previously, one may reconsider a Chapter 7 bankruptcy filing.
Clients or their advisors with questions about chapter 7 business bankruptcy filings should contact Jim Shenwick, Esq 917 363 3391 jshenwick@gmail.com
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