What is a preferential payment?

by DeLadurantey Law Office, LLC on January 16, 2014

What is a preferential payment?When you file bankruptcy, all of your creditors are to be treated similarly. The law does not allow a debtor to “prefer” certain creditors over other creditors. Thus, payments that are made by the debtor shortly before the petition date are presumed to be preferential payments. If a payment is shown to be a preference, the law permits the trustee to recover the money paid directly from the creditor that received the payment.

When does a preferential payment occur?

Section 547 of the Bankruptcy Code provides that a preference occurs when:

•the insolvent debtor transfers property to a creditor worth more than $600 for an antecedent or past debt

•the creditor receives more than it would in a Chapter 7 bankruptcy

•the transfer or payment was made within 90 days before the bankruptcy filing (or within 1 year if the creditor is an insider)

A debtor who makes preferential payment has not committed a “criminal act.” The primary consequence of a preference is that the trustee can take action to recover the money or property so it can be included in the bankruptcy estate.

What about the creditor that received the payment?

Creditors have certain defenses available to challenge the assumption that the payment constitutes a preference. Pursuant to 11 U.S.C. 547(c), the defenses available to the creditor include:

  • contemporaneous exchanges for new value given
  • payments made in the “ordinary course of business” or made pursuant to “ordinary business terms” between the debtor and creditor
  • security interests that secure debts that bring new value to the debtor
  • amounts of subsequent credit extended and unpaid

The trustee typically asks the creditor to refund the preferential payment. If the creditor refuses, the trustee can file a lawsuit within the bankruptcy seeking to recover the money or assets. The creditor can assert one of the available defenses. It is important to note that the burden of proof is on the creditor to establish that the payment is protected by one of the defenses.

To learn more about preferential payments, contact DeLadurantey Law Office, LLC and schedule your initial consultation.

If you are considering filing for bankruptcy protection, let us help. We understand how important your bankruptcy case is to you, and we will handle it with the discretion and dedication that have become our calling cards. Contact the Milwaukee bankruptcy attorneys of the DeLadurantey Law Office, LLC today by calling 414-377-0518.  We can also be found on the Internet and on Facebook.


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