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What Are Preferential Payments in Bankruptcy?

If you are considering filing for bankruptcy and there are certain parties you owe money to that you would like to pay before your filing, this blog is for you! Bankruptcy law requires all of your creditors to be treated similarly in your filing. Thus, a debtor is prohibited from “preferring” one creditor over other similar creditors. The trustee assigned to your case will review all payments made by the debtor in the days leading up to the filing and certain payments are assumed to be preferential payments. If a preferential payment has been made, the trustee is allowed to recover the funds paid directly from the party who received the payment.

According to Section 547 of the Bankruptcy Code, a Preferential Payment Occurs When:

• a debtor who is insolvent transfers assets or funds in excess of $600 to a creditor for an antecedent or past debt

•the creditor obtains more than it would if the debtor had filed a Chapter 7 bankruptcy

•the payment occurred within 90 days prior to the bankruptcy filing (or within 1 year if the creditor is an insider)

It is important to understand that if you make a preferential payment, you have not committed a crime. In fact, the consequence of a preference in bankruptcy is that the trustee is given the authority to pursue and recover the money or assets transferred in order to include it in your bankruptcy estate.

If the Creditor That Received the Payment Wishes to Object to the Assumption That the Debtor’s Payment Constituted a Preference, There Are Certain Defenses Available Under 11 U.S.C. 547(C), Including:

  • contemporaneous exchanges for new value given
  • payments made in the “ordinary course of business” or made pursuant to “ordinary business terms” between the debtor and creditor
  • security interests that secure debts that bring new value to the debtor
  • amounts of subsequent credit extended and unpaid

Typically, the trustee will simply ask the creditor to refund the payment. If the creditor ignores this request, the trustee has the ability to file a lawsuit within the bankruptcy case to recover the funds or property. The creditor can argue that one of the defenses under Section 547 applies and thus the payment does not constitute a preference. The creditor has the burden of proof to prove that the payment is protected by the defense.

If you are considering filing a bankruptcy and you need help determining which type of filing would be best for you, contact Fitzgerald Campbell to schedule an appointment. We do not offer just one debt relief option, we don’t push you in one direction. If bankruptcy right for you, we will tell you. If it’s not, we will tell you that. If bankruptcy is your get out of debt plan, it needs to be done right. It needs to be in the hands of experienced lawyers who have been there before. Contact us today!

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