A payment made by a debtor to one or more creditors before filing for bankruptcy that results in the cost of an unequal amount of debt to their other creditors is referred to as a preferential transfer.
What Is a Transfer of Preference?
The bankruptcy system allows debtors to rebuild their finances while promoting justice to creditors. According to the Bankruptcy Code, any procedures for creditor payment must be administered fairly and without favoring one creditor over another.
This premise covers even the time before the case is filed.
Preferred transfer
Generally, if you pay any of your creditors more than $600 ($6,825 for company debt) in the 90 days before declaring bankruptcy, this is seen as a payment made while you were insolvent. The trustee in a bankruptcy proceeding may recoup this payment since the court will consider it a preferential transfer.
Workings Of Preferential Transfers
The bankruptcy trustee will consider several variables when determining whether preferential transfers have occurred.
Debt Types
There are various categories of debt for bankruptcy purposes. Debt typically falls into one of four groups:
Administrative debts are those incurred during the administration of a bankruptcy case, such as trustee or attorney costs.
Credit cards, medical bills, trade debt, signature loans based on a commitment to pay without security, incidental debts like IOUs, and loans from friends and family are generally unsecured.
Examples of Preferential Treatment
Why would you favor paying one creditor over others? You are typically free to make such financial decisions under standard conditions (outside of bankruptcy). You might want to pay off your Visa card more quickly since it might have a greater interest rate or amount than your Mastercard.
Things get complicated when you assert that you no longer have enough money to repay everyone.
Has Access To Favorable Transfers
The bankruptcy process is intended to ensure that all of your creditors receive equal treatment and that no one receives preferential transfers when you assert that you are insolvent (something the court presumes beginning 90 days before you file for bankruptcy). The transfer occurred within 90 days of the bankruptcy filing or one year if the creditor was an insider.
Getting Rid of the Preference
The trustee has the authority under the U.S. Bankruptcy Code to seize funds provided to creditors with preference and distribute them to all other similar creditors more equally. Avoiding selection is the term for this.
The 90-Day Rule Exemptions
It will be more difficult for the trustee to demonstrate that the payment was preferred if a creditor can show that the debtor was solvent at the time the preference was made; that is, they had more assets than liabilities. If the trustee had proof that the debtor was insolvent that far back, they might also try to have payments made earlier than the 90-day lookback period annulled.
Priority Debt And Secured Debt Are Preferences.
Against secured and priority debt, the trustee's avoidance power is less usually employed. Due to the agreement between the creditor and borrower that an asset of the borrower may be sold to settle the obligation, secured debt has a special status. Other debtor assets would replace a secured debt's preferred payment if the trustee chose to forgo it.
Examples of the Rule
The trustee's ability to prevent preferential transfers is not an exception to the rule that there are no exceptions to rules. The following three are the most typical:
Contemporaneous conversation: There is no preference when you pay for a purchase you make at the exact moment. Choices must relate to obligations in place before the transfer transaction.
ordinary course: when you're conducting business "in the normal course of operations." For instance, if you typically pay invoices 30 days after receiving inventory, you are conducting business as usual, and your payments are not seen as preferential transfers.
New Value: The payment was not preferential if you made it in exchange for a debt you already owed, but the creditor afterward granted you new value. The delivery of products to you by a seller after you have paid a past-due account illustrates fresh importance.
Unjustified Behavior
In a bankruptcy case, preferential transfers are payments made to some creditors at the expense of other creditors. Preferential transfers were often charges paid during the 90 days before the bankruptcy filing. The bankruptcy trustee has the authority to recover payments that meet the criteria for preferential transfers and redistribute them equally to the other creditors.
Preference Attack Liability Avoidance
Although there are typical legal defenses to preference attacks, prevention is frequently the best form of protection. A business may consider imposing advance payments or Cash On Delivery (COD) arrangements to avoid creditor status because favorable transfers only apply to creditors.
