The bankruptcy clawback provision allows a bankruptcy trustee to evaluate past finances and reverse, or "claw back," amounts that violate bankruptcy code limits.
The bankruptcy clawback provision lets a trustee look back at your finances before you filed and undo, or "claw back," any transfer that improperly moved property out of your estate. Once the trustee reverses a transaction, that property comes back into your case, where it's either exempt (you keep it) or sold for your creditors. (11 U.S.C. § 547; 11 U.S.C. § 548.)
What Types of Transfers Can Be Clawed Back?
Two kinds of transfers trigger a clawback: preferences and fraudulent transfers. Here's how they stack up.
|
Key Factor |
Preferences |
Fraudulent Transfers |
|
What Counts |
A payment to a creditor shortly before you filed. |
Giving away property or selling it for far less than it's worth. |
|
Look-Back Period |
90 days for regular creditors; one year for insiders. |
Two years under federal law (often four to six years, and sometimes longer, under state law). |
|
Dollar Threshold |
None for the look-back periods themselves, but claims below $600 (consumer debts) or $8,575 (business debts) can't be pursued at all. |
None. Any amount can qualify. |
|
Intent Required? |
No. Preferences are avoidable regardless of intent. |
Not always. Transfers can be "constructively fraudulent" without any intent to hide assets. |
Preferences
A preference is a payment you make to a creditor before filing that gives that creditor more than they'd get in your bankruptcy case. The look-back period is 90 days for an ordinary creditor and one year if the payment went to an "insider"—such as a close relative or business associate. Separately, if your debts are primarily consumer debts, a trustee can't pursue a preference claim worth less than $600 (in aggregate, to one creditor), no matter which look-back period applies. Business filers whose debts aren't primarily consumer debts get a higher floor of $8,575 (valid April 1, 2025, to March 31, 2028, and adjusted every three years).
Insiders include a general partner, a general partner's relatives, and a corporation's officer, director, or person in control, as well as a managing agent of the debtor. The money the trustee claws back from a preferred creditor is divided among your creditors according to the bankruptcy priority payment rules. (11 U.S.C. § 547.)
Fraudulent Transfers
A fraudulent transfer happens when you give away money or property, or sell it for much less than it's worth, so your creditors can't get it. That's "actual fraud." But you don't have to intend to defraud anyone for a transfer to count. A filer commits "constructive fraud" by failing to get a reasonably equivalent value while insolvent. Family members are common recipients, often on the understanding that they'll return the property when the case closes.
The trustee can undo a fraudulent transfer made up to two years before you filed for bankruptcy and pull the property back into your bankruptcy estate. If the trustee believes you were trying to hide assets, you also risk losing your discharge entirely. (11 U.S.C. § 548; 11 U.S.C. § 727.)
How Far Back Can a Trustee Look at Your Transfers?
It depends on the transfer type. The rules call for 90 days for preferences to regular creditors, one year for insiders, and two years for fraudulent transfers under federal law. A trustee can sometimes reach back even further—often four to six years, and in some cases up to 10 years—by using your state's fraudulent transfer law (or, when the IRS is an eligible creditor, federal tax law) instead of the Bankruptcy Code.
The trustee also has a deadline to sue. Generally, the suit must be filed within two years after your case begins, or one year after the first trustee is appointed, whichever is later. (11 U.S.C. § 546.)
Can You Defend Against a Clawback Action?
Yes, sometimes. If a trustee comes after you or the creditor who received the payment, a few defenses are worth raising. For a preference claim, you can argue the payment was made in the ordinary course of business, that the creditor gave new value in return (goods or services), or that it falls below the dollar thresholds above.
For a fraudulent transfer claim, the fight usually comes down to whether you got reasonably equivalent value, or whether you were actually insolvent at the time. If you've made any of these payments, talk to a bankruptcy lawyer before filing. The lawyer can explain whether a clawback is likely to occur and help you prepare for litigation if needed.
Need More Bankruptcy Help?
Understanding the clawback provision is just one piece of the bigger bankruptcy picture. Here's where to go next.
- Find out what property you can protect by reviewing bankruptcy exemptions.
- Learn what the trustee will ask about your finances at the meeting of creditors.
- If you're worried about a payment or transfer you made before filing, get help from a bankruptcy lawyer.