Preferences are a type of transfer made by a debtor to a creditor before a bankruptcy petition is filed that the trustee may avoid and force the creditor to pay back to the estate. 11 U.S.C. § 547(b). The bankruptcy system was created to promote fairness to creditors while at the same time provide debtors a fresh and new financial start. Therefore, the payment of creditors must be equitable and no one creditor can be favored over another. This equitable principle applies, even before the debtor has filed for bankruptcy.
Under the bankruptcy system, a debtor has made a preferential transfer when he or she pays some creditors but does not pay other creditors shortly before the bankruptcy case is filed. In these circumstances, a bankruptcy trustee may void the transfer and claw back the property, and recapture the money and redistribute it to all similar creditors on a more equitable basis. Not all payments to a particular creditor prior to filing for bankruptcy will be classified as a preferential payment. Therefore, the Bankruptcy Code requires all debtors to disclose payments made in the 90 day period before filing for bankruptcy, but only if the payment totaled to $600 or more for a single creditor during that period. A debtor’s experienced attorney can then help determine if any preferential payments have been made and help prevent any issues with the trustee after the bankruptcy case is filed.
A payment to a creditor must meet several different criteria in order to be categorized as a preferential transfer. 1) The transfer must be of an interest that the debtor has in the property. A “transfer” includes creating a lien, retaining a security interest, foreclosing a debtor’s equity of redemption, and each mode…of….parting with…property…or…an interest in property.” 11 U.S.C. § 101(54)(D). 2) The transfer must be made for the benefit of a creditor. 3) The transfer must also be used to pay a debt that existed before the payment was made. 4) The transfer must have been made to the creditor while the debtor was insolvent. 5) The transfer must have occurred within 90 days prior to the filing of the bankruptcy, or within 1 year if the creditor was a family member or a friend. 6) The creditor received more than it would have received in a Chapter 7 case if the transfer had not been made.
To simplify, if in the 90 days prior to filing for bankruptcy, the debtor transferred money or property that was worth $600 or more to a creditor while the debtor was insolvent and the payment caused that creditor to receive more than it would have been entitled to through the bankruptcy, then the transfer is a preferential transfer. Insolvency is automatically presumed for debtors within the 90 days prior to filing for bankruptcy. Moreover, transfers to family members or friends can also be classified as preferential payments. However, the look back period is 1 year, instead of 90 days. The result of a preferential transfer, is that the trustee will seek that fund or property back from you after your case is filed.
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To learn more about preferential transfers and how to avoid them or resolve that issue while still filing for bankruptcy, you should consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!
