Bankruptcy Preference
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Bankruptcy Preference

An important part of modern bankruptcy law is the bankruptcy preference. This is a tool frequently employed by bankruptcy trustees in order to prevent opportunistic creditors from getting more than their fair share of your debt payments.

According to the U.S. bankruptcy laws, a bankruptcy preference allows a bankruptcy trustee to recover payments that were made to certain creditors made shortly before the beginning of a bankruptcy proceeding. This, in a sense, levels the bankruptcy playing field for all your creditors and discourages aggressive collection actions.

To learn more about how a bankruptcy preference may work in your unique situation, fill out the form below to secure a free, no-hassle consultation with a local bankruptcy attorney.

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Bankruptcy Preferences in Action

When you file for bankruptcy, the court will appoint a bankruptcy trustee to deal with your creditors. This trustee, in turn, is given the power to recover certain payments made to certain creditors shortly before your bankruptcy case began.

This recovery of pre-bankruptcy payments is intended to prevent creditors from pursuing aggressive collection actions immediately before you file for bankruptcy. Historically, these types of unfair tactics occurred all too often, leaving debtors at a distinct disadvantage.

These preferential (or pre-bankruptcy) collection efforts are not illegal, but the law has implemented bankruptcy preferences in order to try to level the playing field between creditors.

What can be Recovered Through Bankruptcy Preferences?

In order to have a bankruptcy preference, all of the following elements must be met, as listed in Section 547 of the bankruptcy code:

  • Payment on a prior debt
  • Made when a debtor was insolvent
  • To a non-favored creditor within 90 days of the filing of the bankruptcy, or between 90 days and 1 year before the filing if the creditor was an insider
  • That gives the creditor more money than he would have been able to obtain through the proper bankruptcy channels

To clarify the second element, a non-favored creditor means a creditor of an unsecured debt, such as credit card debt. If a creditor has a secured debt in your name, then it is entitled to full payment, and this the bankruptcy preference would not apply. An insider creditor is a creditor that the debtor has a personal relationship with- like a friend or relative- or a general partner of the debtor.

Defenses to a Bankruptcy Preference

Even if your trustee files a bankruptcy preference against a creditor, the creditor might be able to hold onto your previous payment.

According to 11 U.S.C. Section 547(c), defenses against a bankruptcy preference claim that will allow a creditor to keep its payment include:

  • Debt payments made in the ordinary course of events between the creditor and debtor
  • Contemporaneous exchanges
  • Secured debt

Typically, bankruptcy trustees today will attempt to file bankruptcy preference claims against all of the creditors who received payments within 90 day of a bankruptcy filing. Some of these will not pan out, but others may prove fruitful.

Of course, bankruptcy preferences are a very isolated feature of bankruptcy law. To learn more about your other bankruptcy questions, contact a local lawyer today.

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Keep in mind that these laws are complex and this is for informational purposes and is not legal advice. Laws may have changed since our last update. Speak to a local bankruptcy attorney for legal advice about your particular situation.

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