Can a Debtor’s Preferential Payments Be Recovered During Bankruptcy?

 Posted on March 31, 2022 in Debt Collection

When a debtor files for bankruptcy, the person’s creditors will be understandably concerned about how this may affect their ability to recover the amounts owed to them. While the bankruptcy process will usually allow creditors to receive some of what is owed, there are a variety of issues that may result in creditors receiving less than they should. Preferential payments made by debtors can be a significant issue in these cases, and improper actions by debtors may result in some creditors being treated unfairly. If a creditor believes that a debtor has made preferential payments, they will want to determine how they can address this issue and ensure that these payments will be recovered so that assets seized during bankruptcy will be properly distributed to all creditors.

Elements of Preferential Payments

When filing for bankruptcy, debtors are prohibited from giving preferential treatment to one creditor over other types of debts they owe. Preferential payments made to a creditor prior to when a debtor filed for bankruptcy may be “avoided” by the bankruptcy trustee in their case. Creditors may request that the trustee pursue a “clawback” action to recover preferential payments that were made and ensure that all of a debtor’s assets will be properly distributed during the bankruptcy process.

A payment or transfer to a creditor may be considered preferential if it satisfies all of the following elements:

1. The payment was made to a creditor or for a creditor’s benefit.

2. The payment was for an antecedent debt that existed prior to when the payment occurred. A payment toward a new debt or in exchange for goods or services received at the time the payment was made usually will not be considered to be preferential.

3. The debtor was insolvent at the time the payment was made. Generally, a debtor will be presumed to be insolvent during the 90 days before filing a bankruptcy petition.

4. The payment was made within certain time limits. For payments made to commercial creditors, this time limit is 90 days. For creditors who are considered insiders, such as family members or business associates of a debtor, a payment may be considered preferential if it occurred between 90 days and one year before the debtor filed for bankruptcy.

5. The payment resulted in a creditor receiving more than they would have received in a Chapter 7 bankruptcy proceeding in which the debtor had not made the payment. Creditors with secured debts are entitled to receive the full value of the collateral, so payments made toward these debts generally will not be considered preferential. However, payments made to an unsecured creditor will usually be considered preferential, since they will typically result in a creditor receiving more than they would following the liquidation of the debtor’s assets in Chapter 7 proceeding.

If creditors believe that a debtor made preferential payments, they may notify the bankruptcy trustee and provide evidence corroborating these claims, such as invoices or bank records showing that transfers were made within the 90-day window before the debtor filed for bankruptcy. The trustee may then take action to recover these payments and ensure that they are included in the bankruptcy estate.

Contact Our Chicago Creditor Defense Attorneys

At Dimand Walinski Law Offices, P.C., we provide representation for creditors during bankruptcy proceedings. We can help determine whether a debtor made preferential payments, and we will ensure that this issue is properly raised during the bankruptcy process and addressed by a trustee. To get legal help with issues that affect creditors during bankruptcy, contact our Cook County creditors’ rights lawyers at 312-704-0771.

Sources:

https://www.law.cornell.edu/uscode/text/11/547

https://www.americanbar.org/groups/business_law/publications/blt/2010/03/09_taylor/

https://blogs.orrick.com/distressed-download/2015/02/13/decoding-the-code-preferences-under-section-547-of-the-bankruptcy-code/