What You Need to Know About Bankruptcy Preferences

Pictured is a tabletop with the hands of two people examining paperwork | Alfred Abel Discusses What You Need to Know About Bankruptcy Preferences

As Philadelphia bankruptcy lawyers, clients often ask us if a bankruptcy court will look at debts already paid to creditors prior to filing a bankruptcy case. While filing bankruptcy addresses debts that a debtor is no longer able to pay, bankruptcy also looks at payments made to creditors that occur during a specific time period before the bankruptcy filing. In fact, under the bankruptcy preferences law, a bankruptcy trustee can require payments made to creditors shortly before the bankruptcy filing be paid back to the trustee.

What are Bankruptcy Preferences?

Bankruptcy preferences are any transfers of a debtor’s interest in property or assets (including cash) that include the following five elements:

  1. made to or for the benefit of creditor
  2. made for or because of a debt owed by the debtor
  3. made while a debtor was insolvent (unable to pay their debts)
  4. made on or within the 90 days immediately preceding the date the debtor filed their bankruptcy petition, or 90 days to one year if the creditor was an “insider”
  5. gives the creditor the potential to receive more than the creditor would have received in a bankruptcy liquidation had it not received the transfer.

If the transfer or payment satisfies the required elements for a preference, a bankruptcy trustee may seek to reverse the transfer forcing the property or asset to be placed in the debtors estate. (Section 547 of the U. S. Bankruptcy Code)

Key Elements of a Bankruptcy Preference

Transfer or Payment

A transfer of property or payment of money from a debtor to a creditor is easily identifiable. However, some transactions that also qualify as transfers under preference law are less straightforward. For example, a payment may come from another party, such as an affiliate or owner of the customer, or an insurance company. Perhaps no “transfer” took place, but a debt was addressed by some other mechanism.

To or For the Benefit of a Creditor

In assessing whether a transfer was “to or for the benefit of a creditor,” a trustee will consider all options. Sometimes, a transfer may have been to another party, but the creditor still received benefit from it.

Payments within 90 Days of Filing

The “within 90 days of filing” requirement appears to be straightforward. However, a payment does not officially occur until it clears the accounts of both the company receiving the funds and the debtor issuing the payment. Accordingly, a payment made should be deposited as soon as possible to start the clock running.

Consult Alfred Abel Law Offices for an Experienced Bankruptcy Lawyer

The attorneys at Alfred Abel Law Offices provide trusted bankruptcy representation to individuals and creditors throughout the Philadelphia area. If you need advice from a highly regarded and experienced bankruptcy attorney or have questions about bankruptcy preferences, contact us today for a consultation.

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