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What Is A Preference In A Bankruptcy Case?

Federal bankruptcy law takes into consideration that when filing a bankruptcy case, prospective debtors may favor or "prefer" certain creditors just immediately prior to filing their bankruptcy case. Bankruptcy trustees may recover these payments to creditors which are deemed "preferential."

Examples of preferences are a debtor singling out a friend and repaying him or her for a personal loan, or simply making a payment to a credit card company. Often, prospective debtors may make a preference involving a family member. To avoid discharging a debt owed to a family member in bankruptcy, they may repay a personal loan. The fact or variable that turns a simple payment to a creditor into a preference is its proximity in time to the filing of the bankruptcy case.

§547 of the Bankruptcy Code defines a preference as:

  • Payment on an antecedent or previously incurred debt in contrast to a current debt;
  • made while the debtor was insolvent;
  • to a non-insider creditor, within 90 days of the filing of the bankruptcy;
  • that allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Note that there is a 90-day rule for non-insider creditors, who are neither family members nor associated with the debtor through some corporate entity like a corporation or limited liability company (LLC). Such creditors, known as insiders, are subject to a one-year rule rather than the 90-day rule. There is also no presumption that a debtor is insolvent as to payments made to insiders. Thus, any payment to an insider within one year prior to the bankruptcy filing may be a preference.

Payments to a secured creditor aren't preferences because the creditor didn't receive more than it would have in bankruptcy, in which case the creditor would get the value of the collateral securing its claim.

11 U.S.C. 547(c) outlines a debtor's available defenses to a trustee recovering a preference. These include:

  • contemporaneous exchanges;
  • payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms;
  • security interests that secure debts that bring new value to the debtor; and
  • amounts of subsequent credit extended and unpaid.

A debtor is not penalized by having to pay an amount equal to the preference to the case's assigned bankruptcy trustee. Rather, the trustee recovers the preference from the creditor. Pursuant to § 550 of the Bankruptcy Code, a trustee may avoid and recover any preferential payments by instituting a lawsuit against the creditor.

Determining if a prepetition payment to a creditor is a preference may be a difficult analysis and requires the assistance of an experienced bankruptcy attorney. The experienced South Florida defense attorneys at Loan Lawyers are here to help you if your financial position necessitates the consideration of a bankruptcy case filing under Chapter 7, 11, or 13. To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling (888) FIGHT-13 (344-4813).