Avoiding Powers

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Avoiding Powers

Avoiding Powers which is also known as the Strong Arm Clause is a mechanism to avoid claims that are called secured but are unsecured. In line with this, the trustee acts as a Judicial Lien Creditor with perfection on the date the petition is filed. Also, if the trustee wins in a priority match with the gsecuredh party, the gsecured claimh is avoided and becomes a general unsecured creditor.

PIn avoiding powers, with respect to real property, the trustee is treated as a bona fide purchaser. If the bona fide purchaser wins against the secured party, the secured party is treated as a general unsecured party with an unsecured non-priority claim. The purpose of this provision is to avoid unperfected secured claims.

Another significant thing about avoiding powers is it gives the trustee the power to void any transfers of real property. This is a doorway to state law for fraudulent transfers. The trustee can avoid any transfer of interest that is voidable under applicable state law; generally states have a 4 to 6 year look back period. And also it limits the trustee to a 1 yr look back period?therefore the trustee has at least a 1 yr look back period, but if state law is longer, the trustee may use that under ˜ 544(b).

One important thing pertaining to avoiding powers is that it designed to accomplish the recovery of payments that were preferential. Then, the look back period is 90 days prior to filing. The trustee recovers preferential payments made to creditors to prevent the dismantling of the debtor. If the creditor is an insider (a family member w/in 3 degrees of sanguinity or a director, or shareholder) then look-back is 1 year.

Furthermore, regarding to avoiding powers, to constitute a preference, the following important matters must be considered:

-The debtor must be insolvent.

-The payment must be for antecedent. It pertains to debt that was accrued before the payment.

-The payment must be made within 90 days of the bankruptcy filing.

-To or for the benefit of the creditor.

-The creditor must receive more than he would have received otherwise.

Moreover, the grant of a security interest can be considered a preference. It must be granted in exchange for credit that was previously granted. There are vital things to remember in avoiding powers. Now the question in avoiding powers is when does the transfer take place? The answers are the following:

E=extension of credit by the creditor to the debtor

A=when the security interest attaches (creditor has given value, the debtor has authenticated a security agreement, debtor has rights in the collateral)


C=commencement of the bankruptcy case

T=(transfer) with equal either A,P,C

-If P occurs within 30 days of A, T=A

-If P is more than 30 days after A, then T=P

-If there is no perfection by the latter of C and 30 days after A, then T = the moment just before C.

-To or for the benefit of the creditor.

Now, we all know how important this is. It prevents us from claiming secured claims which are actually unsecured. The filing of bankruptcy is not that complicated. However, we must also put into consideration how avoiding powers affect the process. For additional information with this matter, visit a Spokane Valley Bankruptcy Lawyer today.