Preferential Transfers In Bankruptcy

Navigating the intricate terrain of bankruptcy, the concept of preferential transfers takes center stage. In the financial intricacies of insolvency, understanding what constitutes a preferential transfer and its implications is paramount.

What Is a Preferential Transfer?

A preferential transfer in bankruptcy involves a payment made to a creditor shortly before filing for bankruptcy, potentially favoring one creditor over others. Identifying and addressing preferential transfers is essential for ensuring fair treatment among creditors and maintaining equitable distribution of assets in bankruptcy proceedings.

Five Elements Define Preferential Transfers

Preferential transfers in bankruptcy involve five crucial elements:

  • Payment to a Creditor: A payment must be made to a creditor.
  • Within the Preference Period: The payment should occur within the defined preference period.
  • Antecedent Debt: The payment is linked to an antecedent debt.
  • Debtor’s Insolvency: The debtor must have been insolvent at the time of the payment.
  • Creditor Receives More: The payment results in the creditor receiving more than in a Chapter 7 distribution.

Ordinary Course of Business

In bankruptcy, the term “ordinary course of business” refers to the normal and routine transactions a debtor conducts with its creditors. When evaluating preferential transfers, the court examines whether a payment made to a creditor was consistent with the ordinary course of business.

If a payment aligns with the historical dealings between the debtor and the creditor, it may be deemed an ordinary transaction and not subject to avoidance as a preferential transfer. Understanding what constitutes the ordinary course of business is crucial for both debtors and creditors navigating bankruptcy proceedings.

What Is Preferential Payment in Bankruptcy?

A preferential payment in bankruptcy refers to a payment made by a debtor to a creditor before filing for bankruptcy that gives the creditor an advantage over other creditors. The bankruptcy code allows the bankruptcy trustee to avoid or undo such preferential transfers to ensure fair treatment among creditors.

To qualify as a preferential payment, the transfer must meet specific criteria, including being made to a non-insider creditor, occurring within a certain time frame before the bankruptcy filing, and allowing the creditor to receive more than they would in a Chapter 7 liquidation.

How Far Back Can the Bankruptcy Trustee Look for Preferential Transfers?

The bankruptcy trustee can typically look back for preferential transfers up to 90 days before the debtor filed for bankruptcy. This period is extended to one year if the preferential transfer involves an insider, such as a family member or business partner. The ability to scrutinize transactions within these time frames helps the trustee identify and address preferential payments made by the debtor before the bankruptcy filing. It’s essential for creditors and debtors alike to be aware of these look-back periods and the potential implications for preferential transfer claims.

Preferential Payment Cases Designed to Protect All

Preferential payment cases are designed to protect all creditors by preventing debtors from favoring certain creditors over others before filing for bankruptcy. The bankruptcy code aims to ensure fair treatment of creditors by allowing the trustee to recover payments made to specific creditors within a specified timeframe before the bankruptcy filing.

This helps distribute the debtor’s assets more equitably among all creditors, discouraging preferential treatment and maintaining the integrity of the bankruptcy process.

The Look-Back Period for Insider Creditors vs. Regular Creditors

In bankruptcy, the look-back period for insider creditors, such as family members or business partners, differs from that of regular creditors.

While regular creditors are subject to a 90-day look-back period, insider creditors face a more extended scrutiny period of one year before the bankruptcy filing. This distinction is crucial as it allows the bankruptcy trustee to review transactions involving insiders for a longer period, preventing potential abuse or preferential treatment within the year leading up to the bankruptcy.

What Preferential Treatment Looks Like

Preferential treatment occurs when a debtor favors one creditor over others by making payments to that specific creditor before filing for bankruptcy. This preferential payment might involve paying off an old debt, providing an unsecured creditor with more than they would receive in the bankruptcy proceedings, or giving special treatment to certain creditors.

Payments Not Considered Preferential Transfers

Certain payments made by a debtor are not considered preferential transfers under bankruptcy law. For example, payments made in the ordinary course of business, payments made in accordance with ordinary business terms, or payments that qualify as substantially contemporaneous exchanges for new value are typically excluded from being deemed preferential transfers.

What Is an Avoidance Lawsuit?

An avoidance lawsuit, in the context of bankruptcy, refers to legal actions initiated by a bankruptcy trustee to undo certain transactions that could be detrimental to the overall distribution of assets to creditors.

The trustee has the authority to avoid or set aside specific transactions, such as preferential transfers or fraudulent conveyances, which may impact the fair and equitable distribution of assets among creditors. These lawsuits aim to recover the transferred property or funds so that they can be included in the bankruptcy estate and distributed according to the priorities established by bankruptcy laws.

Avoidance lawsuits play a crucial role in maintaining the integrity of the bankruptcy process and ensuring an equitable outcome for all parties involved.

Are There Exceptions to Preferential Transfers?

Yes, there are exceptions to preferential transfers. While bankruptcy law allows trustees to avoid and recover preferential transfers, certain transactions are exempted or may be protected by defenses.

Common exceptions include:

  • payments made in the ordinary course of business
  • payments made for new value received by the debtor
  • transactions that meet the criteria for the contemporaneous exchange for new value defense.

Additionally, certain types of creditors, such as employees for wage claims, may receive preferential payments without facing avoidance actions. It’s essential to understand the specific circumstances and criteria that may exempt a transfer from being deemed preferential, and consulting with a bankruptcy attorney can provide guidance on available defenses and exceptions.

Preferences and Secured or Priority Debt

Preferences in bankruptcy primarily relate to unsecured creditors, and the concept is not typically applied to secured or priority debts.

Secured debts, which are backed by collateral, and priority debts, such as taxes and domestic support obligations, operate under different rules. The bankruptcy code generally prioritizes the repayment of secured and priority debts over unsecured debts.

Therefore, preferences, as defined in bankruptcy law, focus on transactions involving unsecured creditors rather than those holding secured or priority claims.

A Bankruptcy Lawyer Can Help You Organize Your Debts

Navigating the complexities of bankruptcy can be challenging, and seeking the assistance of a skilled bankruptcy lawyer can be invaluable. A bankruptcy lawyer can help you organize your debts, assess your financial situation, and guide you through the legal processes involved in filing for bankruptcy.

At Babi Legal, we understand the complexities involved and are here to guide you every step of the way. Our team of experienced bankruptcy lawyers is dedicated to helping you organize your debts, assess your financial situation, and navigate the legal processes seamlessly. With personalized advice tailored to your unique circumstances, we empower you to make informed decisions aligned with your financial goals. Whether you’re exploring Chapter 7 or Chapter 13 bankruptcy, our expertise ensures you have the support needed for a successful outcome.

Exceptions to the 90-Day Rule

In bankruptcy, the 90-day rule refers to the preferential transfer period, during which certain payments made by the debtor to creditors before filing for bankruptcy might be scrutinized.

However, there are exceptions to this rule that can impact the assessment of preferential transfers. These exceptions often revolve around specific types of creditors, the nature of payments, and the relationship between the debtor and the creditor.

  1. Contemporaneous Exchange: Payments made in the ordinary course of business and in a substantially contemporaneous exchange for new value might be exempt from the 90-day rule. This recognizes that some transactions are part of normal business operations.
  2. Ordinary Course of Business: If a payment is consistent with the ordinary course of business between the debtor and the creditor, it may be considered an exception to the 90-day rule. This acknowledges that routine transactions are less likely to be preferential.
  3. New Value Exception: Payments that secure new value for the debtor and are made to the creditor can be exempt from avoidance. This exception encourages creditors to continue dealing with financially troubled debtors.

Navigating these exceptions requires a nuanced understanding of bankruptcy law. At Babi Legal, our experienced team can provide guidance on how these exceptions may apply to your specific situation, helping you make informed decisions during the bankruptcy process.