What is a Preference in a Chapter 7 Bankruptcy

Section 547 of the Bankruptcy Code lays out Preferences and what they are. In lay man’s terms, a bankruptcy Preference is simply when you “prefer” one creditor over another creditor. I think an example is in order. Say you paid 10k to MasterCard 30 days before filing Chapter 7 Bankruptcy. Now let’s assume during that same time frame you paid your other unsecured creditors nothing. The creditors who receive nothing say, wait a minute, because of MasterCard’s aggressive collection activities, MasterCard received 10k and the rest of us creditors received nothing and that is not fair.

The Bankruptcy Code has provisions in it to sort of level the playing field amongst creditors, especially in the period right before the bankruptcy is filed. Why does the code do this? Because there is a presumption that the creditor who got more than usual somehow knew debtor was on the brink of bankruptcy and pursued debtor aggressively because of it or just got lucky and got debtor to cough up more money to this one creditor than the others.

Section 547 of the Bankruptcy Code allows a Chapter 7 trustee to claw back “Preference” payments made to general unsecured creditors within 90 days prior to filing the Chapter 7 Bankruptcy and within 1 year before the bankruptcy filing for “Inside” creditors like family members. If debtor paid any one of these creditors $600.00 or more in these preference period it is considered a “Preference” and the trustee “may” be able to claw back these payments and spread them to all creditors pro rata. I say “may” be able to claw them back because there are defenses to preferences. If you have received an action to avoid a preference, call a bankruptcy attorney immediately.

CONCLUSION

When the time is right, or when you are ready, reach out to Minnesota’s OLDEST bankruptcy law firm at www.kainscott.com. You will be so happy you did!