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LawTalk
LawTalk, Attorney
Category: Business Law
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Experience:  I have 25 years experience in the practice of law.
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Is the interest and principal received by a creditor on a

Customer Question

Is the interest and principal received by a creditor on a fixed rate loan subject to clawback as a fraudulent transfer if debtor is insolvent?
Submitted: 1 year ago.
Category: Business Law
Expert:  LawTalk replied 1 year ago.
Good morning,
I'm Doug, and I'm sorry to hear of the confusion. My goal is to provide you with excellent service today.
Insolvency alone will not result in the claw back that you identify, in which creditors who having received payment from the debtor are ordered by the court to return monies received as of a certain date, forward, for distribution to all creditors under a bankruptcy proceeding.
That having been said, the simple fact that a debtor makes monthly payments to a creditor in the time before chapter 7 bankruptcy is filed does not automatically result in such a claw back. The decision to claw back is up to the bankruptcy trustee.
There are two kinds of payments that might result in a claw back by the trustee, and they are related to a payment known as a preference---or preferential payment. This often occurs when a person makes payments to preferred creditors, friends or family members and not to all creditors equally.
If a person pays a friend, relative or even a partner in business more than $600 over the 12 months before the bankruptcy filing, it will be considered a preference. Payments equaling more than $600 to traditional creditors in the 90 days before the person files chapter 7 can also be deemed a preferential payment. This is the money that may potentially be clawed back.
Now, you have used the term fraudulent in your question, and such a payment as you describe would not be a fraudulent transfer.
A fraudulent transfer is generally defined as a person paying or giving away property or funds, or their selling of personal or real property for much less than it's worth, just to avoid the creditors getting a hold of it. It is worth mentioning often these kinds of fraudulent transfers are made to friends or family members such that the person making the transfer may be able to reclaim some of the money or assets following the discharge of bankruptcy. Fraudulently transferred property is also subject to claw back.
You may reply back to me using the Reply link and I will be happy to continue to assist you until I am able to address your concerns, to your satisfaction.
Please remember to rate my service to you so that I can be compensated for helping you.
I wish you and yours the best in 2015,
Doug