When filing for bankruptcy, individuals are subject to certain look-back periods, which are periods in their financial past that the bankruptcy trustee will examine. In New York, the bankruptcy lookback periods are as follows:
- Six months for the Chapter 7 means test
- 90 days to check for preferential transfers
- 1 year to check for insider preferential transfers
- 2 to 4 years to check for fraudulent transfers.
Below, we explain these lookback periods and how they apply to New York bankruptcy filing. For sound guidance on your specific situation, don’t hesitate to consult bankruptcy attorney John D’Amato.
What is a Look-Back Period? Definition and Example
A look-back period refers to a specific length of time in the past that is used to evaluate particular categories of transactions. For instance, pension companies often examine an individual’s income spanning three to five years in the past, to ascertain that individual’s average or highest salary. The pension company can then use this data to determine the benefits the individual will receive upon retirement.
In bankruptcy, a lookback period is a length of time prior to the bankruptcy filing, in which the bankruptcy trustee makes certain examinations. The trustee will (A) determine the income range of the filer (means test), and (B) look for specific transactions that violate bankruptcy rules.
New York Lookback Period for Chapter 7 Means Test
The means test assesses an individual’s income during a specific period, and based on this evaluation, either qualifies or disqualifies them for Chapter 7 bankruptcy. Typically, the income look-back period for Chapter 7 is six months before the final day of the month preceding the debtor’s filing date. If your income during this six-month lookback is less than the state limit, you are eligible to file for Chapter 7 bankruptcy.
What Transactions are Evaluated During the Look-Back Period?
The other aspect that a bankruptcy trustee will examine during a lookback period is any transaction that breaches the bankruptcy law. There are generally three types of transactions that can complicate any bankruptcy filing (not just Chapter 7): preferential transfers, insider preferential transfers, and fraudulent transfers.
Preferential Transfers and Lookback Period
Also called a preference, a preferential transfer is a payment to a specific creditor that the debtor made before filing for bankruptcy. Essentially, the debtor “preferred” or “favored” that creditor by paying them first before any other creditor. If the bankruptcy trustee discovers any preferential payment within a 90-day lookback period, the trustee has the authority to invalidate the payment and demand its return.
Insider Preference and Lookback Period
In bankruptcy law, an “insider” is a creditor who is personally close to the debtor, such as their family member or other relative. The court may also consider a creditor to be an insider if they have a close enough relationship to the debtor, such as a friend. The bankruptcy trustee will look for any preferential payment that the debtor makes to an insider creditor within a 1-year lookback period.
For example, let’s say a debtor repays a loan they had taken from their grandparents for Christmas expenses, but they fail to clear their credit card debts within the specified look-back period. The debtor may be personally closer to their grandparents than to the credit card company, but in the eyes of the bankruptcy court, both debts must be paid fairly. Consequently, both the family and the credit card company are deemed to have equal rights to the money that the debtor already paid to the grandparents. The trustee will now have to undo that payment to give both creditors their equal claim.
Fraudulent Activities and Lookback Period
Another transaction category that is subject to scrutiny involves potentially fraudulent activities. The typical look-back period for such transactions ranges from two years under federal law and six years under NY state law.
One type of activity that a bankruptcy trustee may flag involves charges or debts accumulated towards luxury purchases or cash withdrawals, which are suspected to be fraudulent. The court may assume that the debtor did not have the intention to repay these transactions. Such misuse of the bankruptcy system may require the debtor to provide evidence contrary to this assumption.
Another common type of fraudulent activity is fraudulent transfer, which is the act of transferring property out of a debtor’s name to delay or deceive a creditor. For instance, if a debtor sells a property valued at $1 million to their Uncle Dan for a mere $1 to try to avoid collection pressure from a creditor, this could potentially trigger both state and federal fraudulent conveyance laws.
What Constitutes a Fraudulent Transfer in Bankruptcy?
Occasionally, debtors may try to safeguard a portion of their assets by placing them beyond the reach of their creditors. This behavior can take various forms, with some being more subtle than others. For example, a debtor may deliberately sell an asset below its fair market value, which may not be specifically intended to defraud but still has the effect of removing the property from the creditors’ grasp. Alternatively, a debtor may transfer or even gift an asset with the explicit intention of shielding it from their creditors.
Types of Fraudulent Transfers
There are two distinct kinds of fraudulent transfers:
- Actual fraud refers to the act of transferring property with the explicit intention to deceive creditors.
- Constructive fraud includes transfers made at a significantly inadequate value, such as the aforementioned scenario where property is “sold” below market value. This kind of transfer automatically gives rise to a presumption of fraud, even without direct evidence.
In the context of bankruptcy, constructive fraud is shown in two ways:
- The absence of “reasonably equivalent value” in the transfer
- Signs of financial distress.
Indicators of financial distress include insolvency or being rendered insolvent, possessing unreasonably small capital, and incurring debts beyond the capacity to repay as they become due.
A Fraudulent Transfer’s Look-Back Period
What is the timeframe within which a bankruptcy trustee can investigate a fraudulent transfer? According to the Bankruptcy Code, the default look-back period under federal law is two years, but the trustee can utilize the longer period allowed by NY state law. For instance, New York has adopted the Uniform Voidable Transactions Act (UVTA) which allows a fraudulent transfer lookback period of up to four years.
Role of the Bankruptcy Trustee in Lookback Periods
The look-back period for a bankruptcy filing is managed by a bankruptcy trustee. The trustee, appointed by the bankruptcy judge, assumes the pivotal responsibility of evaluating the viability of a bankruptcy case. Their duty entails identifying potential assets that can be used to satisfy the creditors. This involves conducting a thorough examination of the debtor’s financial situation, particularly if they are the ones initiating the bankruptcy proceedings.
Although trustees maintain a neutral position, one of their primary obligations is to ensure that creditors receive the maximum possible repayment of the outstanding debt. Consequently, the bankruptcy trustee diligently investigates the existence of properties, income, and assets, while also being vigilant to any potential concealment of assets by the debtor.
Consult a Skilled Bankruptcy Attorney in Buffalo, New York
Look-back periods can complicate your bankruptcy process, and navigating them requires professional legal assistance. Talk to Attorney John D’Amato. For almost three decades now, Attorney D’Amato has been assisting individuals in New York with their bankruptcy filing, helping them find the best legal strategy and ensuring they complete the process efficiently.
To discreetly address any concerns you may have regarding your look-back period and obtain comprehensive guidance and solutions, reach out to Attorney John D’Amato at 716-706-0000 today.