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Avoidance Powers in Bankruptcy

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Statutory Liens

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The trustee can avoid statutory liens that first become effective against the debtor's property when the debtor becomes insolvent or within the 90 days preceding the bankruptcy filing.

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Recovery of Fraudulently Transferred Property

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Allows the trustee to recover property that was fraudulently transferred out of the debtor's estate before the bankruptcy filing, ensuring that all potential assets are available for distribution to creditors.

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Strong-Arm Powers

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Trustees can use 'strong-arm' powers under Section 544 of the Bankruptcy Code to avoid transfers or obligations that could have been avoided by certain hypothetical lien creditors, bona fide purchasers, or judgment lien creditors.

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Post-Petition Transfers

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Allows a trustee to avoid transfers made after the bankruptcy petition is filed that were not authorized by the court or as part of the normal course of business.

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Fraudulent Transfers

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Permits a trustee to avoid transfers that were made with actual intent to hinder, delay, or defraud creditors, or that were made for less than reasonably equivalent value while the debtor was insolvent.

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Nonpossessory, Nonpurchase-Money Security Interests

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Trustees may avoid nonpossessory, nonpurchase-money security interests in certain household and personal goods under Section 522(f) of the Bankruptcy Code.

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Turnover of Property

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Under Section 542 of the Bankruptcy Code, trustees can compel the turnover of property to the bankruptcy estate that is in the possession of others but belongs to the debtor.

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Set-Off Rights

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Trustees can offset mutual debts between the debtor and a creditor, thereby reducing the claim of the creditor against the bankruptcy estate when the debts arose before the bankruptcy filing.

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Recharacterization of Debt

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Courts can recharacterize debt into equity if a creditor's loan actually constitutes a capital investment, thus affecting the creditor's priority and ability to receive payment.

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Critical Vendor Doctrine

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Allows a debtor in possession to pay pre-petition claims of 'critical' vendors to ensure the continued supply of goods or services, thus helping maintain the value of the debtor's estate.

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Substantial Contribution

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An administrative expense that can be awarded to those who have made a substantial contribution in a Chapter 11 case. It encourages parties to contribute to the reorganization effort.

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Judicial Liens

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Enables a trustee to avoid a judicial lien that impairs an exemption to which the debtor would have been entitled. This helps maintain the debtor's exempt property for their fresh start.

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Constructive Fraud

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This allows avoidance of transfers made without receiving reasonably equivalent value when the debtor was insolvent, did not receive fair consideration, or was left with unreasonably small capital.

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Equitable Mootness

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A doctrine that precludes appellate review of bankruptcy court orders if effective relief would be impossible due to the implementation of the bankruptcy plan, affecting the finality and feasibility of the plan.

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Insider Preferences

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Trustees can avoid transfers to insiders (like relatives or company executives) made within a year of filing if such transfers gave the insider more than they would receive in a Chapter 7 liquidation.

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Equitable Subordination

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This allows a court to subordinate claims of a creditor to those of other creditors if the claimant engaged in inequitable conduct that resulted in injury to other creditors or conferred an unfair advantage.

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Subrogation Rights

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Trustees may assert subrogation rights to step into the shoes of a creditor who has been repaid and reassert the right of payment from the debtor, specifically when dealing with co-debtors or guarantors.

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Actual Fraud

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Trustees can avoid transfers made with actual intent to defraud creditors, based on proving the debtor's intent at the time of transfer and typically involves transfers made without receiving a reasonably equivalent value.

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Good Faith Defense

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This is a defense raised by transferees against avoidance actions by the trustee. If the transferee received the transfer in good faith and provided reasonably equivalent value, the transfer might not be avoidable.

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Preference Payments

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Allows a trustee to avoid certain payments made to creditors within 90 days before filing for bankruptcy, or one year if the creditor was an insider. The aim is to prevent a debtor from favoring some creditors over others on the eve of bankruptcy.

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