When a debtor about to declare bankruptcy makes a transfer or a payment to someone they owe money, that creditor may later find themselves in the unenviable position of having to return that payment. Why? The debtor’s bankruptcy trustee may decide to claw back the payment for the benefit of the bankruptcy estate. This type of legal action brought by the trustee is known as preference litigation, or avoidable preference litigation, and is enumerated in the Federal Bankruptcy Code.
Preference litigation helps to insure that a debtor’s assets are distributed as prescribed by the Bankruptcy Code. No single creditor should receive preference, or be able to get more than a fair share of the debtor’s available assets in repayment of that creditor’s claim, especially if it means that other creditors will be short-changed as a result.
A bankruptcy trustee bringing an avoidable preference lawsuit must satisfy all of the five conditions below:
- The transfer was made to/for the benefit of one of the debtor’s creditors
- The transfer was made in payment of a prior debt of the debtor
- The transfer was made while the debtor was insolvent
- The transfer was made 90 days or less before the debtor filed for bankruptcy, or within one year of the filing if the creditor in question is a business partner or family member of the debtor
- The transfer in question paid the creditor an amount greater than the appropriately pro-rated amount determined in a Chapter 7 bankruptcy case
It is entirely understandable that a creditor would want to steer clear of avoidable preference litigation and its associated costs. An experienced bankruptcy attorney can be a creditor’s best resource when a debtor’s actions turn out to disrupt the orderly progress of bankruptcy debt collection.
If you would like more information about preference litigation, creditors’ rights, or if you need assistance from an attorney, contact Windtberg & Zdancewicz to schedule an initial consultation.
The attorneys at Windtberg & Zdancewicz, PLC, provide clients with experienced legal representation in all collection matters. We are experienced in creditor’s rights including garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases. If you need assistance with your collection matters, please contact us at (480) 584-5660.