Before you file for bankruptcy, get the facts on preferential transfers to make sure they aren’t rescinded by the bankruptcy trustee.
In a bankruptcy case, a trustee is appointed to review your bankruptcy petition, look for signs of fraud, and attempt to maximize the amount of money available for awarding to your creditors. An important part of the trustees’ responsibility is checking for any preferential transfers that were made just prior to the bankruptcy. Often, these transfers can be reversed to redirect the funds to your creditors, potentially resulting in hardship for a loved one or business contact you may have recently given money to. In order to plan your bankruptcy effectively, it’s important to understand what preferential transfers are and how they will be treated before you file.
What Qualifies as a Preferential Transfer?
Any transfer of cash or property to a creditor could be considered a preferential transfer provided it was:
- Made based on a debt that preceded the bankruptcy filing
- Worth in excess of $600 (or $6,225 in cases mainly involving business debts)
- Made to a creditor within 90 days of filing for bankruptcy
- Made to a family member within 1 year of filing for bankruptcy
- Completed while you were insolvent or presumed insolvent
If the above conditions are met AND the trustee believes that the payment resulted in an unfair financial advantage to the creditor who received the transfer, the trustee could initiate a preference lawsuit. If successful, this suit would result in the cash or property being returned to the bankruptcy estate and divided amongst qualified creditors as appropriate. This recovery process is designed to help prevent individuals from attempting to shield money from creditors immediately prior to filing for bankruptcy by transferring it to family members or business associates.
Defending Against Preference Lawsuits
In certain specific situations, a transfer that seems to meet all the requirements listed above may nonetheless be immune from recovery in a preference lawsuit. For example, if the transfer was a payment made in “contemporaneous exchange for new value,” it usually cannot be recovered. An example of this concept would be an individual who paid off a debt in full only to turn around and get a new loan from the same creditor.
Another example of a transfer that can’t be recovered is any payment made in compliance with a child support or spousal support order.
Get Help From an Expert Bankruptcy Attorney
If you’re considering filing for bankruptcy, seek advice from an experienced bankruptcy attorney immediately. It’s your attorney’s job to help you maximize your debt relief by ensuring you understand the various requirements for filing. This includes eligibility requirements related to the timing of various financial actions like making large non-essential purchases or preferential transfers.
