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Preferential Transfers And Bankruptcy

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Section 547 of the Bankruptcy Code is somewhat complicated, but the main concept is that any transfers to a creditor for pre-filing debt for less than its full value by an insolvent debtor may be avoided if it occurs within the prohibited time period – within 90 days prior to the date of filing for general creditors and for one year if the transferees are “insiders.” Examples of this include paying off a debt to a debtor’s brother-in-law, partner, attorney or accountant, within the prohibited time periods. Preferential transfers may be avoided in a bankruptcy proceeding.

What Exactly Is A Preferential Transfer?

Sometimes, a debtor makes payment to a creditor prior to filing for bankruptcy. In some cases, this is before they know that they are going to file for bankruptcy. In other cases, they may have already decided that they are going to file. These are known as preferential transfers and, because the trustee is responsible for ensuring that a debtor’s creditors receive as much as possible during either a Chapter 7 or Chapter 13 bankruptcy, they have the power to determine when a preferential transfer has been made and if one has been made, determine the appropriate course of action. According to bankruptcy laws, the trustee has the authority and responsibility to look at a debtor’s assets and finances at the time of filing as well as the debtor’s actions prior to filing to determine if a preferential transfer has been made. A preferential transfer, which is also sometimes know as a preference or a preferential payment, occurs whenever a debtor in a bankruptcy filing has performed one of the following:

  • Payment of more than $600 to a single creditor; payments of less than $600 are acceptable;
  • Payment is due to a debt you owed previously;
  • The payment allowed for the creditor to receive more than it would have in a typical Chapter 7 bankruptcy;
  • Payment was made at the time the debtor already had debts that exceeded his or her income; or
  • Payment was made within the 90 days before the bankruptcy was filed, or one year if the recipient was a family member.

What Happens If A Preferential Transfer Has Been Made?

The bankruptcy trustee has the authority to make sure all creditors receive as much as they can and, accordingly, that they have many ways of achieving this goal. If the court makes a determination that a preferential transfer has been made, the trustee can get the money back for the benefit of all your creditors. This is a procedure commonly known as ‘clawback.’ If a debtor has made a preferential transfer, the bankruptcy trustee may be able to get this money back for the bankruptcy estate through this measure. It is important to note that preferential payments are not illegal unless they were made in an attempt to defraud creditors or hide money from the trustee. Even though they are not illegal, the creditor who received the payment still needs to return the money.

Find Out Your Rights And Responsibilities In Bankruptcy with a Merrillville Bankruptcy Attorney

If you are in the position of considering filing for bankruptcy, get the help you need from an experienced bankruptcy attorney to make sure you make the right decisions. The Whitten & Whitten is here to help individuals in the Merrillville area decide what their best course of action is and is experienced in handling all types of bankruptcy issues. Contact us today either by calling us at 219-756-0555 or by contacting us online to discuss how we may help you through your bankruptcy process.

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