What Is A Preference In Chapter 13 Bankruptcy And How It Works

Posted by Wesley Scott on December 5, 2018 at 11:00 AM
Wesley Scott

Section 547 of the Bankruptcy Code covers preferences. Think of a preference like this- on the eve of filing bankruptcy, you preferred one creditor over another by paying one creditor and not the others. There are, generally speaking, two types of preferences.

First, there are preferences to general unsecured creditors. If debtor pays one general unsecured creditor $600 or more within the 90 day period prior to filing Chapter 13 Bankruptcy that is considered a “preference”.

Second, there are preferences to insiders. Section 101(31) defines an insider as a family member or business partner (as well as others). Section 547 states that if debtor pays an insider $600 or more within 1 year prior to filing the Chapter 13 Bankruptcy, that amount is construed as a preferential payment.

In a Chapter 13 Bankruptcy, the Chapter 13 trustee does not pursue avoidance of the preference money. Instead, that money gets added to the pile debtor must pay her creditors back if she files a Chapter 13 Bankruptcy. This is pursuant to Section 1325(a)(4) of the Bankruptcy Code commonly referred to as the “best interest” test rule.

In addition, there are numerous defenses to a preference. These defenses are listed in Section 547(c) of the Bankruptcy Code. For example, if the payment to creditor was in the “ordinary course of business”, the preference cannot be avoided. If the preference cannot be avoided by a Chapter 7 trustee, it does not get added to the hurdle debtor must jump in a Chapter 13 Bankruptcy under Section 1325(a)(4) of the code either. There are a host of other defenses to preferences as well. Your local and licensed bankruptcy attorney can help you identify these defenses.

 

When the time is right, or when you are ready, reach out to Minnesota’s nicest bankruptcy law firm at www.kainscott.com. You will be so glad you did.

Topics: Chapter 13 Bankruptcy