Hypothetical Creditor Law and Legal Definition

Hypothetical creditor refers to a creditor who has a source of authority for the trustee to do more than just avoid transactions. A trustee is entitled to exercise broader rights and powers of a hypothetical creditor. For instance, a trustee may prosecute an alter ego claim to pierce the veil of a corporate debtor, and hold its shareholders liable for the corporation's debts, and those which hold that the trustee has no standing to seek to hold a corporate debtor's shareholders is liable for a particular debt.

When a bankruptcy trustee is exercising rights and powers under bankruptcy law, the trustee is commonly referred to as a hypothetical creditor. [11 U.S.C.S. § 544]. The provisions of the U.S. bankruptcy law give the trustee the rights and powers of hypothetical creditors and gives the trustee the rights and powers of a hypothetical bona fide purchaser of real property.