At the recent NACBA Workshop in Maui, I was joined by my associates, Melissa Betron and Ryan Srnik, from the Law Offices of John T. Orcutt, P.C., for a presentation entitled Wipe Out! Surfing Through Preferences, Fraudulent Transfers, and Avoidance Actions.
Our presentation examined the avoidance powers available under the Bankruptcy Code, with particular emphasis on their practical application in consumer bankruptcy cases. While preferences and fraudulent transfers are often associated with Chapter 11 litigation, these issues arise regularly in Chapter 7 and Chapter 13 cases, sometimes creating unexpected problems for debtors and sometimes providing opportunities to recover money for them.
Summary
We began with six fundamental questions for analyzing a potentially avoidable transfer:
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What property or interest did the debtor own?
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What was transferred, and when did the transfer legally occur?
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Who received the property or benefited from the transfer?
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What avoidance provision applies?
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What defenses might prevent avoidance?
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Who has standing to pursue recovery, and who ultimately receives the benefit?
The presentation addressed several important areas:
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Preferences under § 547: The elements of a preferential transfer, the 90-day and one-year insider lookback periods, and defenses involving ordinary-course payments, contemporaneous exchanges, subsequent new value, and purchase-money security interests.
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Fraudulent transfers under §§ 548 and 544(b): Actual versus constructive fraud, reasonably equivalent value, badges of fraud, state-law avoidance periods, and the implications of the Supreme Court's decision in United States v. Miller, 604 U.S. 518 (2025), limiting the use of § 544(b) against the federal government.
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Recovery of garnished wages: The possibility of using §§ 522(g)–(h) and 547 to recover involuntary prepetition transfers for debtors when the property could be exempted and the trustee does not pursue avoidance.
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Debt-settlement companies: Potential recovery of funds paid to debt-settlement companies, including separate theories involving preferences, fraudulent transfers, unauthorized postpetition transfers, and state consumer-protection laws.
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Chapter 13 standing: Whether and under what circumstances Chapter 13 debtors may pursue avoidance actions, including the distinctions between direct statutory standing under § 522(h) and potentially broader or derivative standing.
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Ethics and attorney fees: Conflicts arising when debtor's counsel is asked to represent the recipient of an avoidable transfer, separate engagement agreements, and appropriate compensation for avoidance litigation.
We also discussed an important distinction that is sometimes overlooked: avoiding a transfer, recovering the transferred property, and preserving the recovered interest are three different steps. Sections 544–549, 550, and 551 serve different purposes, and a successful avoidance action does not necessarily mean that the debtor personally receives the recovered property.
Commentary
For consumer bankruptcy attorneys, avoidance law is often viewed primarily as a problem to avoid. A client repays a parent shortly before filing, gives a vehicle to an adult child, or deeds real estate to a relative, and the bankruptcy trustee may seek to recover the transfer.
Those risks are real, but they represent only half the story.
Avoidance powers can also become affirmative tools for helping debtors. A creditor that garnished several thousand dollars in wages shortly before bankruptcy may have received a preference. Where the statutory requirements are satisfied, the debtor may be able to recover those funds and claim them exempt.
Similarly, payments to debt-settlement companies deserve closer examination. Depending on the ownership of the funds, the circumstances of the payments, and the applicable federal and state law, there may be opportunities to recover money that a struggling consumer paid for services that provided little or no benefit.
These claims require careful analysis. Section 522(h) provides only limited debtor standing, and Chapter 13 standing remains unsettled in some jurisdictions. A preference is not established merely because a payment occurred within 90 days, nor does every violation of consumer-protection law automatically make a transfer involuntary or avoidable.
Nonetheless, I believe consumer bankruptcy attorneys should be more willing to investigate avoidance actions as potential sources of affirmative relief for their clients.
There is also a practical lesson for bankruptcy attorney: The best avoidance analysis often begins during the initial client interview.
Interviewers and paralegals need to recognize that legitimate repayments to relatives, wage garnishments, changes in title, and transfers for less than fair value can have substantial consequences. Identifying these issues early allows counsel to evaluate the applicable defenses, exemptions, chapter selection, and filing strategy before a bankruptcy petition is
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