The bankruptcy code allows the bankruptcy trustee to demand the return of assets that were transferred before a debtor filed bankruptcy under certain circumstances.
- The debtor made payments on a debt that gave that creditor preferential treatment over other creditors. For example, if a debtor repaid a relative while not paying on their other debts, that money may need to be returned to the bankruptcy estate.
- The debtor made purchases, payments or transfers of assets while he/she was insolvent.
- The transfer of assets (including cash and property) was made during the 90 day period prior to filing bankruptcy. This 90 day period usually refers to "outsiders" such as a business or contractor. If the transfer was made to an "insider" such as a relative or friend, the bankruptcy court will consider all transfers made in the year prior to filing bankruptcy. Asset transfers that are made "below value" will receive special scrutiny by the bankruptcy court. For example, selling your $100,000 home to a parent for $200 would raise suspicions as to whether the asset transfer was made with the sole intention of manipulating the bankruptcy system.
There are certain exchanges that are not covered by this part of the bankruptcy code. For example, if there was a transfer of assets in the ordinary course of everyday business, the bankruptcy court would not demand a return of the asset. A small example of this would be if a debtor purchased health insurance before filing bankruptcy, bought groceries before filing bankruptcy or in the case of a business owner-purchased supplies that were necessary for the operation of the company.