What is a Bankruptcy Preference?

A bankruptcy preference is a transfer of an asset shortly before a bankruptcy filing to a specific creditor. These types of transfers result in one creditor being treated more favorably than other creditors. Generally, the trustee will review the 90 days before a bankruptcy petition is filed to determine whether such a transfer should be voided by the bankruptcy court. Transfers to business partners or family members (called “insiders” by the court) will be scrutinized if made up to one year before a filing.
How does this work? Here is an example.
Suppose you have 5 credit cards with balances of $5,000 each which you plan on getting discharged in bankruptcy. 88 days before you filed, and before you decided to file a bankruptcy case, you sent one of the credit card companies a payment of $2,000. The bankruptcy trustee could void that transfer, get the money back, and distribute $400 to each of the 5 credit card companies.
Or, if you have an exemption which covers the $2,000, we could ask the trustee to recover the money and return it to you. In this situation, you have the legal right to keep the recovered funds.

Have questions about bankruptcy preferences? I am happy to help.