Certain transfers can be avoided by the bankruptcy trustee, or the individual assigned to administer a debtor’s bankruptcy case. There are several classes of preferential transfers, and certain defenses to such transfers. This article discusses preferential transfers in the context of a chapter 7 bankruptcy.
If a debtor has paid a creditor a lump sum of $600 or more or several amounts which equal, in the accumulative, $600 or more, within the 90 days before filing bankruptcy, and these payments are not the normal minimal payments due, this is considered a preferential transfer. A preferential transfer or payment means that you have chosen one creditor or several creditors to prefer over other creditors for treatment prior to filing bankruptcy. If the amount is $600 or more, the trustee can avoid the transfer and pursue the funds from the creditor that received payment. The debtor is not penalized for this. The trustee, to make it worth his or her time, usually pursues preferential payments far greater than $600, however. Paying secured debt, priority debt such as taxes, or domestic support obligations, even when they exceed $600 during the past 90 days, does not fall within the parameters of a preferential transfer.
If the transfer was made to an “insider,” that is a family member, friend, business associate, etc., the 90 day period is extended to a one-year period. If the preferential payment is substantial enough, some debtors will wait a full year to file bankruptcy, which renders such transfer non-preferential. This amount must be $600 or more to fall within the parameters of a preferential payment. If it is a preferential payment, the trustee can avoid this transfer. The trustee can demand the money back from the creditor who was paid, and if the creditor is not forthcoming, the trustee can sue the creditor in bankruptcy court. Now, in certain circumstances and especially if the preferential payment was made to a family member, the debtor can always step in the shoes of that family member, and pay the trustee this amount directly (in either a lump sum payment or a structured payment plan) in order to keep the trustee from pursuing the family member.
If it is business debt and the payment is made to a business creditor, the amount that is considered preferential increases substantially to $5,000 or more.
There are defenses to preferential transfers that will be covered in a different article.
If you have questions regarding bankruptcy, and if you are concerned about whether transfers are preferential or not, please call to set up a free in-office bankruptcy consultation.