What is the risk of “clawback” in a Chapter 11 bankruptcy?

The term “clawback” in a Chapter 11 bankruptcy is a process where creditors can ask for repayment of money or property previously paid to another party by the debtor. In regards to California bankruptcy law, the risk of “clawback” is that a debtor could be asked to repay money that was already given away as part of a preferential transfer. A preferential transfer is the transfer of money or property from a debtor to a creditor that happens during the 90 days before the debtor files for bankruptcy. When a creditor receives a preferential transfer, they have a responsibility to return that money or property to the estate, which is then divided among creditors according to the Bankruptcy Code. This “clawback” of money or property can be requested by the trustee in bankruptcy or a creditor who objects to the preferential payment made. If a debtor is found to have made a preferential transfer, the trustee can seek to recover the money or property, resulting in a clawback. In California, the debtor is fully responsible for any clawbacks the trustee would be entitled to receive. It is important for debtors to understand the risk of “clawback” and how their actions during the 90 days prior to filing for bankruptcy could affect their case.

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What is the risk of “clawback” in a Chapter 11 bankruptcy?

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