In the case of the bankruptcy of my business and the payment of creditors, is it better to liquidate the assets or default on creditor lawsuits?
If given the choice, it is preferable to liquidate the assets yourself if you maintain control of them. Often, debtors may ask the bank to liquidate the assets which may in turn discourage creditors from pursuing further action.
In respect to collection agencies, these agencies only get paid if they are able to collect a sum of money. However, upon full liquidation, these agencies too may not pursue further action if there are no longer assets under the individual or corporate entity.
Preferential transfers: transferring assets out of the business prior to filing for bankruptcy
If someone transfers assets out of the business so that the assets are not turned over to the trustee, those assets may be recovered through a process called recovery of a preferential transfer or a fraudulent transfer.
Preferential Transfers are ones that are made either within 90 days of the bankruptcy filing (for non-insider creditors) or within one year of the filing (for insider creditors). These types of transfers are not illegal, but if a creditor receives such a payment or transfer of assets that put the creditor in a better position than other creditors, the creditor receiving the preferential transfer may be required to pay it back to the Trustee so that the funds can be used to pay creditors in accordance with the priority scheme set forth in the bankruptcy code.
Preferential transfer exceptions: there are several exceptions to having to pay back the money, so if a Trustee makes a demand on a creditor, they should check with an experienced business bankruptcy attorney to see whether any of the exceptions apply.
Fraudulent transfers
If a person or entity receives property of the Debtor for less than fair value prior to the filing of the Bankruptcy case, the Trustee may be able to recover the property transferred as a “fraudulent transfer”.
The intent of the parties does not have to be actually fraudulent in nature. It just refers to transfers for less than fair value. This often occurs when Debtors transfer assets to a new entity, or take distributions from a business that have not been earned.
The look-back period is two years under the Bankruptcy Code, but such actions can also be brought under State Fraudulent Transfer laws, which may have a different statute of limitations (four years in California, for example). If a creditor receives a demand for return of a fraudulent transfer, they should check with an attorney to see whether they have defenses.
About the Finkel Law Group
Finkel Law Group, with offices in San Francisco and Oakland, has more than 40 years of experience assisting our clients navigate federal bankruptcy laws and state insolvency statutes. Our attorneys have the experience and expertise needed to help you and your management team successfully complete the liquidation or reorganization of your corporation, partnership or limited liability company.
When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with the bankruptcy and reorganization issues confronting your company please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter for a cost-free consultation.