If a person who files for bankruptcy has made payments or transfers to a creditor within a certain period of time prior to the filing, the Bankruptcy Trustee may be able to invalidate the transfer and recover the money. These types of transfers are called preferential transfers. For many people who file for bankruptcy, preferential transfers are a confusing area of bankruptcy law. However, understanding whether a transfer may have been preferential is important to know before filing for bankruptcy, because preferential transfers can have important consequences for the debtor and their family members or friends.

If you are considering filing for bankruptcy, it is important to contact an Oakland Bankruptcy Attorney about whether bankruptcy is a good option and to consult about how the law of preferential transfers may affect you.

What is a Preferential Transfer?

Preferential transfers are transfers that are made by a debtor within 90 days of filing for bankruptcy. If the transfer is to a family member, related entity, or other insider, the 90-day period is extended to one year.

In order to be preferential, a transfer must satisfy the following criteria:

1. The transfer must be greater than $600 (this threshold is increased for business debts);
2. The transfer must be a payment to a creditor on debt already owed, not an exchange for “new value;”
3. The debtor must have been insolvent at the time of the transfer (there is a presumption that the debtor was insolvent 90 days prior to their bankruptcy);
4. The transfer must have allowed that creditor to receive more than what they would have received in a Chapter 7 Bankruptcy;
5. The transfer must have been made within 90 days of filing for bankruptcy, or 1 year if a family member or insider.

Upon filing for bankruptcy, all of the debtor’s nonexempt assets become part of the bankruptcy estate, which is administered by the Bankruptcy Trustee. It is the Trustee’s job to ensure that the debtor’s unsecured creditors recoup as much from the debtor as possible. This is why, if there has been a preferential transfer, the Trustee will want to make the transfer void, claw back that money, and distribute it to the unsecured creditors.

Why is Understanding Preferential Transfers in Advance of a Bankruptcy Important?

The issue of recovering a preferential transfer is between the Bankruptcy Trustee and the person who received the transfer. If, for example, the Trustee needs to sue to recover the money, the bankruptcy debtor will likely not be a party to that lawsuit. However, preferential transfers can create quite a headache for a bankruptcy debtor.

One of the most important ways in which a preferential transfer can affect a person who files for bankruptcy is if that transfer was to a related entity or family member. Even if a person has given up on keeping up with mortgage payments, car payments, or credit card bills, they may still make payments on debts owed to those close to them. If there is a preferential transfer to a family member, the Bankruptcy Trustee may want to claw back that money, leaving the family member disadvantaged.

Another way in which a preferential transfer can affect a person who files for bankruptcy is if the preferential transfer was secured by a lien on one of the debtor’s assets. Particularly in Chapter 7 Bankruptcy, this is important. If the preferential transfer is voided and the lien is released, that asset may become a non-exempt asset of the bankruptcy estate. In a Chapter 7 Bankruptcy, this could result in the liquidation of the asset, meaning that the debtor loses it.

What about in a Chapter 13 Bankruptcy?

In Chapter 13 Bankruptcy, the debtor’s assets are not liquidated. Instead, the debtor pays off a portion of their unsecured debts according to a Chapter 13 Bankruptcy payment plan. If the debtor has made a preferential transfer to an insider or family member, they may feel obligated to pay that debt. Luckily, a Chapter 13 debtor may be able to avoid the Trustee clawing back the preferential transfer if they add the amount of the transfer into their Chapter 13 payment plan.

Contact an Oakland Bankruptcy Attorney to Discuss Preferential Transfers

If you are considering filing for bankruptcy and have made or are considering making transfers to a creditor, it is important to know how the law of preferential transfers might affect you. To speak with an experienced Bankruptcy Attorney in the Oakland Area, call us at 510-255-4646 or contact us online. If you wait to consult with an attorney after the transfer, it may be too late!

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.