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

In Chapter 11 bankruptcy, “clawback” is the term used to describe the ability of the court to reverse any payments made to creditors within 90 days of filing. This means that funds that were paid to a creditor within that 90-day window may be taken back and redistributed to other creditors. This poses a risk to creditors if they received payments shortly before the filing of a Chapter 11 bankruptcy petition. Depending on the situation, the court may determine that the payments were preferential transfers, meaning that they gave one creditor an advantage over others. If so, the court may reverse or “claw back” those payments and distribute them to other creditors. The risk of clawback can be especially high in Chapter 11 bankruptcy situations in Virginia. In this type of bankruptcy, the court must review all payments made within the 90 days prior to the filing and deem them as preferential or otherwise. If deemed preferential, the payments may be clawed back and redistributed to creditors. This can cause financial difficulty for the creditors who received the payments, as they may be given a much smaller sum of money or none at all. Therefore, it is important for creditors in Virginia to be aware of the risk of clawback in a Chapter 11 case. It is also beneficial for them to familiarize themselves with Virginia bankruptcy laws, as the court may take certain actions based on what is allowed under the law. With this knowledge, creditors can adequately prepare for any potential risks and protect their own financial interests.

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

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