In recent years, there has been a noticeable rise in bankruptcy trustees sending demand letters, document requests, and information requests to debt settlement companies and debt settlement attorneys, and in some cases filing adversary proceedings in an effort to recover fees paid by debtors prior to filing. The goal is straightforward: trustees are tasked with bringing as many assets as possible into the estate for the benefit of creditors, and fees paid to a debt settlement provider in the two years before filing are an attractive and relatively easy target. The legal basis is 11 U.S.C. Section 548, which allows a trustee to recover payments made by a debtor within that window if the debtor did not receive reasonably equivalent value in return and was insolvent at the time. No intent to deceive is required. When a client paid substantial fees but ended up in bankruptcy with little debt actually resolved, the trustee’s argument largely makes itself.

Responding to trustee demands is always a balancing act. When the amount at issue is a few thousand dollars, debt settlement companies and attorneys have to weigh whether mounting a defense is worth the legal expense. That said, where a company or attorney can document actual debt settlements achieved on the client’s behalf, the reasonably equivalent value argument is real and worth considering. Courts do not require dollar for dollar equivalence, and a well-documented record of creditor negotiations and resolved accounts is a legitimate defense. The question of whether to push back should be driven by the facts of the file, not simply by the cost of the fight.

Colorado warrants particular attention. Trustees there are layering claims under the Colorado Uniform Debt Management Services Act, C.R.S. Section 5-19-201, on top of the federal fraudulent transfer analysis. The private enforcement provision at C.R.S. Section 5-19-235(b) allows recovery of three times the total fees, charges, and payments made by the consumer, plus attorney fees and costs. What makes the position taken by several Colorado trustees especially notable is that they are seeking treble damages on all funds paid into the program, including amounts subsequently used to pay the client’s creditors or refunded to the client, not just fees actually retained by the provider. This is a notably expansive reading of the statute, and one that differs significantly from the position most trustees take in other states, where the treble damages calculation is generally limited to fees the provider kept.