What to know about avoiding powers in bankruptcy

On Behalf of | Dec 3, 2020 | Chapter 11 Bankruptcy |

Chapter 11 bankruptcy in North Carolina allows a debtor to slowly repay debts, but they still could have property repossessed before they finish paying. Sometimes, a creditor tries to take more than their fair share of property or place a quick lien before proceedings. This may be resolved with avoiding powers.

Debtor in possession

Debtors usually retain possession of their property under Chapter 11 bankruptcy, which is used by business owners. The debtor becomes the “debtor in possession” and often has the same rights as a trustee, but they still get monitored by an unsecured creditor committee. They must maintain financial records and insurance as well as pay employees.

Under a debtor in possession agreement, the debtor negotiates a payment plan with the committee. Creditors can still file a claim on the property, force the owner to sell or request a trustee to be assigned if they lose faith in the debtor.

Basics of avoidance powers

Since debtors can not remove debts within 90 days before the bankruptcy, a trustee could exercise avoidance powers to remove debts that violate state laws. For example, if the debtor sold their company vehicles for much less than they are worth or placed them in a trust, the trustee could void the transaction. The transaction doesn’t need to be fraudulent to be voided.

The strong-arm clause allows a trustee to void unperfected liens at the time of filing. Taking a lien on the property in this case would usually be a violation of state law. The lien holder commonly loses their claim on the property and their status as a secured creditor.

Avoidance powers primarily benefit the creditor in commercial bankruptcy cases. A debtor should understand their rights. If a business owner feels they unfairly lost property after filing a bankruptcy petition, an attorney may be able to investigate the case.