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Preference Challenge – Can a Bankruptcy Trustee Prevent or Defend it?

Bankruptcy cases can be simple or complex. Thus it is always advised to hire a bankruptcy lawyer to deal with the nuances of the case and get you the benefit of a fresh start. One of the major challenges of a bankruptcy case is having to deal with the trustee’s preference challenge. A majority of the cases, however, do not involve preference problem as they can be easily avoided, defended or circumnavigated. However, it is important to know and understand what bankruptcy trustee’s preferences are so that you and your legal professional are well prepared to handle the problem.

What is Preference Law?

Preference law (Section 547) of the U.S. Bankruptcy Code with around 55 subsections is more than 175 years old with numerous revisions done since the time it was introduced. A preference is a preferential payment (monetary or property) which is made to one creditor within a specified time frame before bankruptcy filing as a preference over your other creditors. Under specific conditions, the creditor which benefitted from the payment can be forced to repay the amount paid or return the property over to bankruptcy trustee. Preference payments can easily be undone. In case the creditor you had paid in preference of other creditors is a friend or relative, the results can be detrimental for you.

To be more specific, preference law is put in force only if a particular creditor is paid within 90 days of the filing of your bankruptcy case. In case the creditor is an insider i.e. family or friend, this period is a full year. Any money paid to a creditor does not necessarily come under preference. To qualify as a preference, it has to meet 5 essential requirements. There are a number of exceptions too. The 5 necessary elements as stated in Section 547(b) of Bankruptcy Code include:

The trustee can avoid any transfer made by a debtor if:

  • It is to or for the benefit of a creditor
  • It is for an account of previous debt owed by the debtor before the said transfer was made
  • It was made when the debtor was broke
  • It was made –
    • Within 90 days prior to the filing of a bankruptcy petition
    • Between 90 days and 1 year prior to the bankruptcy filing, in case the creditor was an insider
  • If the creditor received more than what they would have if –
    • The bankruptcy case was a chapter 7 case
    • The transfer was not made
    • The creditor got payments of such debt to limits provided by provisions specified by law

Can preference be avoided?

Despite what you assume, it is not essential that the pre-petition payment you make is a preferential one. To be sure, you need to consult bankruptcy lawyers such as Dallas based lawyers, Recovery Law Group. It must, however, be kept in mind that the 90 days/1-year deadline is a strict one which needs to be followed. You can easily avoid any problem if you ensure that no such payments are made in the mentioned deadlines while filing for bankruptcy. In case you have made transfers to a creditor within the stipulated time frame, it is advised that you delay the filing of papers till the time has passed.

Sometimes, the situation is such that you cannot hold off filing for bankruptcy. Foreclosure, wage garnishment, and repossession are some of the threatening creditor actions due to which a debtor might have no option of delaying the filing of bankruptcy papers. In this case, it is important to defend the preference. There are some cases, where you might not require to defend the trustee’s assertion of the preference, like –

  • The preference challenge is not against you but against the creditor who received the payment.
  • According to Subsection 547 (c)(8) and (9), a statutory exception for transfer of amount less than $600 exists in consumer bankruptcy cases. The amount being $6,425 in business bankruptcy cases.
  • Bankruptcy trustees generally don’t pursue consumer cases preference payments which are more than $600, if there are no assets involved. This is due to practical reasons. However, it depends on individual cases and the predisposition of the trustee.
  • Sometimes the creditors at the receiving end of the preference are not worth the effort and cost of trying to take any collection actions against them. This is usually the case when the payment receiving party has little to no income or assets which can be legally pursued by the trustee. Another reason might be that the risk of finding or tracking the person is too huge.

Since bankruptcy trustee will also be paying lawyers to pursue the case, it is futile to spend money on pursuing preferential amount when the above-mentioned factors are involved.

Options available if bankruptcy trustee pursues preference

Sometimes, you might encounter a bankruptcy trustee who is willing to go down the road to pursue preference. In such a case, the debtor needs to prove that the payment made to the creditor (preference amount) within the stipulated time frame (90 days/ 1 year) was later paid back by the creditor. This will stop the trustee from pursuing the amount paid, as the money paid by the creditor will nullify the preferential payment. For this to take place, the creditor (family, friend or unknown) must be willing to pay back the amount you paid in order to avoid giving it to the trustee. The timing of the transaction, as well as your treatment of the amount, is equally important too. This is known as the “new value” defense strategy. To get a better hang of the situation, consult bankruptcy attorneys at 888-297-6023.

Assuming you have made a preferential payment and the bankruptcy trustee assigned to your Chapter 7 case is adamant on reversing it, you need to take some action to prevent it. You cannot let the creditor repay and also cannot create the above mentioned “new value” defense as they don’t have enough money to pay you back. In case, you have the amount to pay back the bankruptcy trustee, you can do so. The trustee can accept the preference amount from you, either in full or in monthly payments. You might also get to pay back less than the actual preference amount as both you and the bankruptcy trustee will be saving on attorney fees and other similar expenses.

Can Chapter 13 help in preference?

People filing for personal bankruptcy generally have a choice to choose between Chapter 7 and Chapter 13. However, for the former, you need to pass the means test. In case, you are facing a preference problem, choosing the latter will be more beneficial. This is so because chapter 13 is an excellent way to repay the trustee the due (or reduced) preference amount through the repayment plan. The various advantages associated with it include:

  • Unlike Chapter 7 bankruptcy trustee, a Chapter 13 one will be more open to accepting payments from you since they are already involved in disbursing of payments to creditors through the repayment plan.
  • You do not have to worry about how soon you have to make payments to the trustee.
  • You get more time to repay the preference amount through the Chapter 13 repayment plan.
  • More flexibility is provided while paying preference amount compared to other important debts like a home mortgage, income tax, etc.

Should you let the trustee pursue the creditor for preference paid?

The above-mentioned techniques are extremely helpful if you wish to protect the creditor whom you had made payments prior to filing for bankruptcy. If however, there is no such personal obligation to protect the creditor, it is not essential to go through the entire rigmarole. Some situations where you won’t try to interfere with the trustee’s proceedings to collect the preference include –

  • When your relationship with the creditor is not so good, you wouldn’t care if the trustee forces them to cough up the money.
  • Your relationship has deteriorated over the timeframe and you are unaffected by the repayment efforts being made against them.
  • If the creditors can afford to hand over the preference amount to the trustee. You can later voluntarily pay them the preference amount back. The dues are likely to be discharged after bankruptcy.
  • If your relationship with them is excellent due to which they don’t hesitate in paying back the amount to the trustee

Understanding and mastering the law is not everyone’s cup of tea. It is therefore important that you consult bankruptcy attorneys for your case and are completely honest with them. Answer all questions related to any payments made to anyone and provide them with all necessary details. Since bankruptcy is stressful, you should be careful while answering the question. You might forget to mention about any payments made to friends or relatives as they are not your conventional creditors. Thus you might forget to count the payment thus made as preference. If you don’t alert your lawyer about these transactions, this could backfire. Trust your lawyer to bail you out of any situation. They can protect you from any possible situation if you tell them the truth.


    2023-01-12T11:11:33+00:00