Types

• There are two situations in which the clawback provision in bankruptcy is used. Clawback is used in regard to fraudulent and preferential transfers.
  
  

Fraudulent Transfer

• A clawback is used to return assets that a debtor fraudulently transferred to avoid including them in a bankruptcy case.
  
  

Preferential Transfer

• A debtor in bankruptcy must treat all creditors equally. If prior to filing bankruptcy (normally within a period of 120 to 180 days) the debtor pays off a select creditor the bankruptcy trustee will clawback that preferential payment.
  
  

Benefits

• The primary benefit associated with clawback is that assets that otherwise are unavailable due to inappropriate transfers by the debtor are made part of the bankruptcy for potential distribution to all creditors.
  
  

Famous Ties

• Bernie Madoff, the center of the largest Ponzi scheme in history, is in bankruptcy (and federal prison). The bankruptcy trustee used clawback theory in order to attempt to gain the return of certain assets and funds Madoff transferred to others.