Cite as: Keith M. Lundin, Lundin On Chapter 13, § 8.15, at ¶ ____, LundinOnChapter13.com (last visited __________).
When the debtor has made a transfer of property that might be in fraud of creditors or preferential, Chapter 13 does not always require avoidance or recovery of the transferred property. Instead, the debtor can often pay creditors the lost value through a plan, avoiding an attack on the transfer itself.
Payment over time allows Chapter 13 creditors to receive at least what they would be paid in a liquidation under Chapter 7,1 including the value of recoverable fraudulent conveyances, preferences and the like. Though it is possible for the debtor or the Chapter 13 trustee to recover a fraudulent conveyance or preference,2 this power is rarely used in Chapter 13. Such matters are more easily resolved by “cashing out” the transfers—valuing the interest of the estate in the transferred property and proposing to pay at least that amount to unsecured claim holders during the life of the plan. This can be a substantial advantage when the transferee is an entity with whom the debtor desires to continue to do business or is a family member, coworker or friend. The Chapter 7 trustee is less likely to permit the debtor to pay the value of a preference or fraudulent conveyance over time, nor is the Chapter 7 trustee likely to be sensitive to the debtor’s relationships with the beneficiaries of avoidable prepetition transfers.
Typically, financial incentives are lacking for creditors or the Chapter 13 trustee to make detailed investigation of the Chapter 13 estate to identify preferences or fraudulent conveyances. In consumer Chapter 13 cases, even if avoidable transfers are present, there is little likelihood of avoidance litigation. Chapter 13 can be the least disruptive way for the debtor to resolve avoidance action problems.
1 11 U.S.C. § 1325(a)(4). See § 90.1 In General: Plan Payments vs. Hypothetical Liquidation, § 90.2 Exemption Issues, § 90.3 Exclusions and Exemptions after BAPCPA, § 90.4 Nondischargeable Claims, Guaranteed Claims and Tardy Claims, § 90.5 Discount Rates and Interest If Liquidation Would Produce Dividend and § 90.6 Discount Rates and Interest after BAPCPA.
2 The power of a Chapter 13 debtor to recover preferences and fraudulent conveyances is subject to some dispute. See § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances. The power of a Chapter 13 trustee to recover preferences and fraudulent conveyances has generally been recognized but is rarely used. See § 53.12 Avoidance and Recovery Powers.