Chapter 11 is a strategy that Pennsylvania debtors might try to use when they are seeking debt reorganization. It is beneficial for business owners who would like to keep the business going, but want to keep the financial issues of the business separate from the personal finances of the owners and shield shareholders. There are various aspects to a Chapter 11 that a debtor should understand before moving forward with the process.
One issue that can arise with the Chapter 11 is how avoidable transfers are handled. With a Chapter 11, there is a trustee or a debtor in possession and they have the right to use their avoiding powers. With avoiding powers, a debtor who transferred money or property in a certain time frame prior to filing for bankruptcy can have it undone by the trustee or debtor in possession. When this transfer is avoided, the transaction can be canceled with the payments or property returned or subject to disgorgement.
Once that is done, the payments or property can be used to repay the creditors. In general, the debtor in possession or the trustee can use this power for transfers the debtor made within 90 days prior to the petition being filed. If, however, the transfers were made to people who are insiders and were made up to a year prior to the filing, it can be avoided for a year. Insiders will be a relative, a general partner, officers of the debtor and directors. The trustee can avoid transfers based on state law. This frequently gives longer time periods. The purpose of avoiding powers is to stop a debtor from making payments before the petition is filed if they are done to unfairly repay one creditor and not the others.
Avoidable transfers are just one of the issues in a Chapter 11 that could be confusing to a debtor. Those who are overwhelmed by debt to the degree that they are considering a Chapter 11 reorganization filing should make certain that they have assistance in the entire case from a lawyer who understands all the laws and how to address them to have a successful filing.
Source: uscourts.gov, “Chapter 11 — Bankruptcy Basics — Avoidable Transfers,” accessed on Oct. 30, 2017