Bankruptcy Preference Law
Bankruptcy laws in the United States have been enacted to provide financial relief for individuals and companies suffering from inability to pay debts. Bankruptcy preference law is confusing and difficult to understand by professionals and lay persons. Under bankruptcy law, a preference is defined as payment of a debt to one creditor rather than dividing assets equally amongst all creditors.
Bankruptcy preference laws have been enacted for the purpose of achieving equity amongst creditors, wherein the assets of the bankruptcy estate are shared equally. After filing of a bankruptcy proceeding, a Trustee is appointed to take possession of assets and property of the debtor and to distribute the proceeds equally amongst secured and unsecured creditors.
Bankruptcy law presumes a debtor's insolvency occurred during the 90-day period prior to case filing. In the event an individual or corporate debtor transfers property or assets to a preferred creditor within that 90-day period, the Trustee may file an action to set aside those payments, and return the assets to the bankruptcy estate. A preference is viewed as a transfer of property or assets by a debtor to a creditor on the basis of a preexisting, as opposed to a current debt.
A preference may occur in the event a debtor transfers property or assets to a close family member or, in the event of a business, a partner or person with the ability to control assets, often referred to as an "insider." Loan payments made to friends and family members within one year prior to the filing of the bankruptcy action are often considered as preferences and are subject to recovery. A preference may also occur in the event the debtor purchased real estate property, but knowingly delayed recording of the documents until after the debt was secured.
Bankruptcy preference laws are for the benefit of unsecured creditors and may have little effect on debtors under Chapter 7 bankruptcy, which provides a full discharge of all debts. Return of preference payments are often required for debtors under Chapters 11 and 13, both of which are reorganization/repayment plans. Many corporate debtors choose to file Chapter 11 bankruptcy, which allows the continuation of business operations, while making payments to the Bankruptcy Court. Chapter 13, on the other hand, is structured to provide payment plans for individuals with ongoing and regular sources of income, and allows ownership of personal property and assets.
Bankruptcy preference laws have been enacted for the purpose of achieving equity amongst creditors, wherein the assets of the bankruptcy estate are shared equally. After filing of a bankruptcy proceeding, a Trustee is appointed to take possession of assets and property of the debtor and to distribute the proceeds equally amongst secured and unsecured creditors.
Bankruptcy law presumes a debtor's insolvency occurred during the 90-day period prior to case filing. In the event an individual or corporate debtor transfers property or assets to a preferred creditor within that 90-day period, the Trustee may file an action to set aside those payments, and return the assets to the bankruptcy estate. A preference is viewed as a transfer of property or assets by a debtor to a creditor on the basis of a preexisting, as opposed to a current debt.
A preference may occur in the event a debtor transfers property or assets to a close family member or, in the event of a business, a partner or person with the ability to control assets, often referred to as an "insider." Loan payments made to friends and family members within one year prior to the filing of the bankruptcy action are often considered as preferences and are subject to recovery. A preference may also occur in the event the debtor purchased real estate property, but knowingly delayed recording of the documents until after the debt was secured.
Bankruptcy preference laws are for the benefit of unsecured creditors and may have little effect on debtors under Chapter 7 bankruptcy, which provides a full discharge of all debts. Return of preference payments are often required for debtors under Chapters 11 and 13, both of which are reorganization/repayment plans. Many corporate debtors choose to file Chapter 11 bankruptcy, which allows the continuation of business operations, while making payments to the Bankruptcy Court. Chapter 13, on the other hand, is structured to provide payment plans for individuals with ongoing and regular sources of income, and allows ownership of personal property and assets.
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