The Trustee’s Ability to Avoid Preferential Transfers

Among the many powers of the trustee, section 547 allows the avoidance of transfers that are fully effective outside of bankruptcy. Generally, non-bankruptcy law permits the preferential treatment of a creditor, however the policies of bankruptcy law does not allow some transactions to occur. The basic purpose is to identity transfers that illegitimately prefer a specific creditor over others and disrupt the collective process of bankruptcy.

Identifying Preferential Transfers is Lawyer’s Job

However, unlike fraudulent transfers, preferential transfers do not require bad faith or knowledge. Thus, it is important to be able to identify preferential transfers because it allows the trustee to reverse certain transfers that occurred before the filing of the bankruptcy petition.

To Be Avoidable the Transfer Must Satisfy Every One of the Following Elements:

First, there must have been a transfer of interest in property of the debtor to or for the benefit of a creditor. “Transfer” is defined in broad terms and includes the act of perfecting a security interest. But the main point is that the creditor must have benefitted from something of value from the debtor.

Second, the transfer must have been on account of antecedent debt. The term “antecedent” generally refers to debt owed by the debtor before such transfer was made. So, if the debt arose before the transfer was made, it is antecedent.

Third, the debtor must have been insolvent at the time of the transfer. To determine insolvency, most courts use the balance sheet test which is when liabilities exceed assets at fair valuation.

Fourth, the transfer must have occurred within 90 days before the filing of the petition. If the transferee was an insider such as a family member or close personal friend, the transfer must have occurred one year before the petition.

Lastly, the transfer must have improved the creditor’s position. This means the transfer must have enabled the transferee to receive more than it would have received under a chapter 7 liquidation.

Known as the “improvement in position” test, this element is the main purpose of preferential transfers. Because the debtor gives a creditor a higher level of payment on its claim than it has the right to receive, the transfer is not allowed. The idea behind it is that the transfer disrupts the evenhanded treatment of creditors.

Several of these elements are open to debate and frequently arise in litigation. If you have any questions about trustee’s powers or preferential transfers, call Lanigan and Lanigan in Winter Park, Florida. They have over 36 years experience in bankruptcy and debtor/creditor law and will make sure you understand all your rights as a debtor or a creditor.