Use of "Avoiding Powers" - Filing Bankruptcy and the Law

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When a case is filed, the trustee and in some cases the debtor are imbued with certain "avoiding powers" under Sections 544(a)(3), 547, and 548 of the Bankruptcy Code. This may let the debtor sue creditors and "undo" certain harmful transactions that fell within certain time periods leading up to the filing. Some Examples are:

If a creditor obtained a judgment and put a lien on the debtor's house within 90 days prior to the filing, or obtained a pre-judgment writ of attachment, the avoiding powers allow a debtor the power to sue to set these aside and remove the lien.

If there is a judgment or other lien which "impairs" or cuts into the debtor's exempt property, then that lien can be "avoided" or canceled, and removed from the property, with the debt treated as completely unsecured. This increases the debtor's equity in the property.

If a creditor has a lien against the debtor's property, but has not completed all of the paperwork properly, i.e., he has not crossed all of his T's and dotted all of his I's, then the debtor may seek to "avoid" or cancel the lien as being unperfected under the "strong-arm" powers of Section 544(a)(3).

Avoiding Powers Can Be Damaging

If a transfer has been made in the past 90 days, or year (for insiders and relatives), to which the debtor does not object. As a strategy, the debtor may wish to wait until the preference or other period has expired, before filing the bankruptcy petition. Otherwise, the trustee may exercise his avoiding powers to recover the payment or other property transferred.

Summary

In conclusion "Avoiding Powers" can be very powerful rights. The debtor and his attorney should review these matters, and time the filing to take full advantage of them. If the bankruptcy filing is delayed, it may result in the loss of valuable legal rights. On the other hand, if a transfer has been made to which the debtor does not object, the debtor may wish to wait until the preference or other period has expired, before filing the bankruptcy petition.