Ponzi-Scheme Insolvency
Definition
An insolvency where the debtor operated a Ponzi scheme: early investors received returns paid from later investors' capital rather than genuine investment gains. The trustee must trace which payments were principal returns (recoverable) and which were fictitious profits (potentially recoverable from net winners).
- Trustee task
- Trace principal returns versus fictitious profits
- Clawback target
- Net winners, investors who withdrew more than they put in
- Legal tool
- Fraudulent-transfer avoidance action
Common questions
What is a net winner in a Ponzi-scheme insolvency?+
A net winner is an investor who withdrew more money from the scheme than they originally deposited, meaning some of what they received was other victims' capital rather than their own return.
Can early investors be made to repay their gains?+
In many jurisdictions yes, through clawback or fraudulent-transfer avoidance actions, since those payments are treated as fictitious profits taken from later investors rather than genuine earnings.
Related terms
- Bankruptcy Examiner
- An independent investigator appointed by the court in a bankruptcy case to investigate specific matters such as fraud or mismanagement. Unlike a...
- Clawback (Avoidance Action)
- A lawsuit brought by the trustee to recover assets or payments that left the estate before bankruptcy. The trustee's avoidance powers are...
- Fraudulent Transfer (Fraudulent Conveyance)
- A transfer of assets made with intent to hinder, delay, or defraud creditors, or made for less than reasonably equivalent value while...
- Preference Payment
- A payment made to a creditor within the statutory preference period (typically 90 days before bankruptcy filing, one year for insiders) that...
- UNCITRAL Model Law
- The UNCITRAL Model Law on Cross-Border Insolvency (1997), a template for coordinating insolvency proceedings across borders. Countries that adopt it (including the...