What is a preferential transfer or payment in a bankruptcy case?

Sat, Sep 8, 2012


Let us say you know you are going to file bankruptcy soon and use the last of your money to pay off a debt to a specific creditor. You feel this is the right thing to do for whatever reason—maybe you owe them the most or you owe them the least or you think they are the most deserving of the money. Overall, you thought you were doing the right thing. This happens all the time. However, what many people do not realize is that the trustee of your bankruptcy case might object to this payment and call it a preferential transfer or payment.

What does the trustee care if this happened before the bankruptcy? Well, the trustee is bound by bankruptcy law to make sure that all unsecured creditors receive the most money they can–equally. No creditor is to be given preferential treatment. So, if your excess payment to a specific creditor is within a certain time frame, usually 90 days, the trustee may try and get that payment back to meet the requirement of the bankruptcy laws.

Here is a detailed explanation of Section 547 (b) of the U.S. bankruptcy laws, which covers preferential transfers. There you will find the detailed circumstances that cause the U.S. to consider payments and transfers preferential—and the ones that do not.

Christopher D. Smith at SmithLaw handles numerous bankruptcy cases every year. Preferential transfers and payments come up from time to time in our cases. It shows us that those filing bankruptcy should carefully consider their recent monetary past.

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