“Avoidance of Preferential Transfers” – what in the world could this mean and why does it matter to me…may be what you’re thinking right now. And, by the sound of it, I wouldn’t blame you. But if you’ve made preferential transfers before filing bankruptcy and the Trustee of your case is seeking their avoidance, you may find yourself caring very much about this topic.
Let’s start from the beginning… The bankruptcy laws have been established in this country to give the deserving debtor a fresh start; a chance to start anew and leave discharged debts behind forever. But the counter balance to this is the law’s underlying policy to treat creditors fairly and to treat creditors of the same class similarly. And so, the laws have been created to promote these policies.
One fundamental fairness concern relates to how we treat our creditors just before filing a bankruptcy case.
For example, say you owe money to unsecured creditors: Bank Apple, Bank Berry, and Bank Carrot; and you’ve you decided that you need to file bankruptcy. But because you really liked Bank Apple, you decided to pay off your debt with them before you filed your bankruptcy case. This would be unfair to Bank Berry and Bank Carrot. They should share in that last payment in proportion to how much they’re each owed, at least, that’s how the law sees it.
What is a Preferential Transfer?
The payment to Bank Apple just before filing bankruptcy is probably a preferential transfer. And because this is not allowed, the Trustee is authorized to “avoid” the payment – or make it void and require Bank Apple to return it to the bankruptcy estate for fair distribution to all three creditors.
The bankruptcy code outlines how a “transfer” becomes a “preference” that can be avoided by the Trustee in 11 USC §547(b).
Transfers of debtor’s property (or of an interest in debtor’s property) can be avoided by the Trustee if they were made:
– To or for the benefit of the creditor;
– For an antecedent (previously existing) debt owed by the debtor;
– Made while the debtor was insolvent (and debtors are presumed insolvent during the 90 days before filing bankruptcy)
– Made –
- On or within 90 days before the date of filing bankruptcy, or
- Between 90 days and one year before filing bankruptcy, if the creditor at the time of the transfer was an insider (family member, friend, or business partner);
– That enables the creditor to receive more than the creditor would receive if –
- The case were a case under chapter 7;
- The transfer had not been made; and
- The creditor received payment of the debt to the extent allowed by the bankruptcy law.
Avoidance of Preferential Transfers
So what if Bank Apple was really your elderly mother who loaned you $10,000 to live on because work was slow. And you’ve decided to file bankruptcy but want to pay off Mom before you file – bad idea.
The Bankruptcy code section above tells us that if you do pay Mom off and then file a case within a year after the payment, the Trustee will try to avoid that payment. Yes, this means, the Trustee will demand the $10,000 back from your mother – even if she’s already spent it – very scary prospect for Mom.
Now, before the rule applies to a transfer, each of the elements of the rule must be met and no exceptions to the rule applicable. These are assessments that only an experienced, knowledgeable bankruptcy attorney should make. And they’re part of the process of preparing a bankruptcy case.
Experienced and Dedicated Bankruptcy Law Firm
If you live in or near St. Louis, Missouri and have questions about Chapter 7 bankruptcy or Chapter 13 bankruptcy and how the laws may apply to you, please contact me, Attorney Nancy Martin, today at (636) 536-5355 or online. We’ll talk about your situation and how to fix the debt problems you’re facing.
If you’re interested in reading other bankruptcy blog posts on the letter “A”, see below:
[learn_more caption=”St. Louis Bankruptcy Attorney” state=”open”] Nancy Martin is a St. Louis, Missouri attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy and other debt relief alternatives, contact us online or by phone at (636) 536-5355. The office is located at 150 North Meramec Avenue, Suite 400, St. Louis, Missouri 63105.
We help people in St. Louis, St. Charles, Chesterfield, Ballwin, Creve Coeur, Maryland Heights, Ladue, Manchester, Kirkwood, Webster Groves, Wildwood, Bridgeton, Fenton, Eureka, Ellisville, Des Peres, Clarkson Valley, and Frontenac. This includes the municipalities within St. Louis County, St. Charles County, Jefferson County, Franklin County, Warren County, and Lincoln County.[/learn_more]