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

The risk of “clawback” in a Chapter 11 bankruptcy in Minnesota refers to the fact that the law allows a debtor to reclaim, or “claw back”, funds that were distributed to creditors prior to filing bankruptcy. This means the debtor may be able to recover payments that were made within the ninety days prior to filing the bankruptcy petition, as well as those made within the one year period prior to filing if the payments were made in favor of a few select creditors, i.e. those that have a “preferential” status. The debtor can also attempt to reclaim assets or property that may have been sold or transferred to creditors prior to filing bankruptcy. Clawback provisions exist to provide a practical mechanism for creditors to be treated fairly in a bankruptcy situation. From the debtor’s perspective, the risk of clawback proceedings can be significant if they have spent funds or transferred assets prior to filing that must then be reclaimed. Moreover, any funds or property that have been distributed must be repaid in full within a certain amount of time or the debtor may be liable for any deficit. Ultimately, the risk of clawback in a Chapter 11 bankruptcy in Minnesota is a real one. Debtors should be aware of the potential consequences of preferential payments or transfers of property and assets prior to filing. If a debtor engages in such practices prior to filing a bankruptcy petition, they should be prepared to repay the taxes or property in full or face potential liability for the deficiency.

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

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