- A preferential transfer, or preferred transaction, is a payment made to a creditor prior to the filing of the bankruptcy that is avoidable by the bankruptcy trustee. To be considered preferential, the amount paid must be more than the creditor would receive in a Chapter 7 bankruptcy, made when the debtor was insolvent and made within the time frame set forth in the bankruptcy code. For example, if you have an unsecured loan at your local bank that you pay off the month before filing bankruptcy because you do not want to include it in the filing, the trustee may deem the transaction preferential.
- The look-back period for a preferred transfer is 90 days before the filing of the petition or between 90 days and one year before the filing, if the transferee was an insider.
- If the bankruptcy trustee determines that a preferential transaction took place that meets the requirements of the bankruptcy code, the trustee may avoid the transfer. By avoiding the transfer, the trustee would require that the money paid in the transfer be returned. Once the funds are returned, the money would be distributed to all unsecured creditors equally.
- One defense to the preferential transfer claim is that the transaction was made contemporaneously with new value given to the debtor, meaning the debtor received something new from the payment as opposed to paying off old debt. A new transaction is not considered a preferred transaction, only the paying of a prior debt.
- Another potential defense is that the transaction created a security interest in new property acquired by the debtor. This is only applicable if the security interest is perfected within 30 days of the debtor receiving the property.
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