As well as selling assets, the Trustee has the ability to investigate the conduct of the bankrupt prior to being made bankrupt. Any transaction that has the effect of putting assets out of the reach of creditors can be set aside, depending on the circumstances at the time of the transaction.
This can involve transferring assets for nil or low value to a spouse or relative, at a time when the bankrupt suspects he or she is insolvent. It can also involve the money paid for the asset being given to a third party. In each case, the Trustee has the right to set the transaction aside and may recover money from third parties that can go towards the estate for distribution to creditors.
A Trustee will be much more inclined to go to the cost of investigation a transaction and recovery of monies paid when the transaction is large (often occurring when there are business debts involved). Creditors may be asked to contribute to the cost, if it is likely that it will yeild a return.
Smaller bankruptcies (usually as a result of consumer debt) are less likely to involve complex investigations or extensive cost, but all bankrupts need to be aware of the Trustee's right to investigate.
It is very important not to attempt to favour one creditor over another when debts get out of control. Creditors are entitled to be treated equally when a person is insolvent, and paying one creditor in full while ignoring another means that creditor receives an unfair advantage. Such payments can be recovered from the creditor by the Trustee, where the transaction is found to be a preferential payment.
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