What Is a Preference In a Bankruptcy Case?


What Is a Preference In a Bankruptcy Case?

When filing a bankruptcy case, debtors may favor or prefer certain creditors immediately prior to filing their bankruptcy case. In certain circumstances, bankruptcy trustees may recover these preferential payments to creditors.

  • 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.

If a debtor repays a friend for a personal loan or makes a payment to a bank for credit card debt within 90 days of the bankruptcy case filing, federal law will consider these preferences. Debtors often make preferential payments to members of their family to avoid the discharge of a debt in bankruptcy. What essentially makes a payment to a creditor a preference is its proximity in time to the bankruptcy case filing.

There is a 90-day preference rule for non-insider creditors, considered parties who are neither family members nor associated with the debtor through a business organization like a corporation or limited liability company (LLC). Creditors who are, in fact, family members or are associated with the debtor through a business entity are known as insiders and subject to a longer one-year rule rather than the 90-day rule. There is no presumption that a debtor is insolvent for payments made to insiders. Therefore, any payment to an insider within one year prior to the bankruptcy filing may be a preference. A payment of a debt for the benefit of an insider may be a prefernce as well, i.e., paying a bill owed by a family member.

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

A bankruptcy trustee may not recover all payments that are preferential. 11 U.S.C. 547(c) provides a debtor with certain 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 required to pay an amount equal to the preference to the case’s assigned bankruptcy trustee. Instead, the trustee recovers the amount of the preference from the creditor. § 550 of the Bankruptcy Code permits a trustee to bring a lawsuit against the creditor and recover any preferential payments.

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. Contact H. Lehman Franklin, P.C. today for a free consultation and case evaluation. Lehman Franklin and Kimberly Ward will give you the best representation possible in your bankruptcy matter. Our office is located at 127 North Main Street in Statesboro, GA (30458). We proudly serve Bulloch County, as well as the surrounding counties of Chatham, Candler, Evans, Bryan, Effingham, Screven, and Jenkins. Contact our office by telephone at 912-764-9616, by email at info@hlfranklin.com, or check us out online at hlfranklin.com. We’re available to meet your legal needs Monday through Friday from 8:30 AM until 5:30 PM.