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

"Clawback" is a term used in Chapter 11 bankruptcy law in Washington which is the risk of a debtor’s creditors requiring the debtor to return payments that were made to a creditor before the bankruptcy filing. When a Chapter 11 bankruptcy petition is filed, an “automatic stay” is put in place that prohibits any creditor from attempting to collect debt from the debtor. This includes any payments that have been made in the time between the debt being incurred and the bankruptcy filing. However, the bankruptcy court may decide that this payment was an “avoidable preference” because it was made to a creditor right before bankruptcy and it could have been made to other creditors, who would now receive less if the payment wasn’t returned to the court. In this case, the court may order the payments to be “clawed back” from the creditor and returned to the bankruptcy court. The risk of “clawback” is a real concern for businesses that are considering filing for Chapter 11 bankruptcy. The best way to minimize the risk of “clawback” is to make sure all of your payments to creditors are equal and that there are no payments made to a creditor within 90 days of filing for bankruptcy. Doing so can significantly reduce the risk of “clawback.”

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

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