What Does A Chapter 13 Trustee Do With A Preference?

Posted by Wesley Scott on December 7, 2018 at 11:13 AM
Wesley Scott

We have discussed what the two most common types of preferences are previously. In consumer debtor cases, a preference is typically a payment of $600 or more to a general unsecured creditor made within 90 days prior to filing the Chapter 13 Bankruptcy. It is also considered a preference to pay a family member or business associate $600 or more within the previous one year period prior to filing a Chapter 13 Bankruptcy.

Unlike a Chapter 7 Bankruptcy case, where a trustee can bring an action to avoid the preference and demand creditor return the preference funds to the estate, Chapter 13 Bankruptcy is different. In a Chapter 13 Bankruptcy, Chapter 13 trustees do not avoid preference payments. Instead, the preference payments get added to the pile/hurdle debtor must repay creditors under Section 1325(a)(4) otherwise known as the “best interest” test rule.

As stated in prior blogs, there are numerous defenses to preferences as outlined in Section 547(c) of the Bankruptcy Code. When there is a viable defense to the preference, the preference amount does not get added to the amount debtor has to repay creditors. Why is this? Because if a Chapter 7 trustee could not have avoided the preference in a Chapter 7 Bankruptcy it does not get added to the pile debtor has to repay in a Chapter 13 Bankruptcy. Section 1325(a)(4) of the code says as much.

For example, debtor may have repaid Visa 5k in the 90 days prior to filing Chapter 13 Bankruptcy. However, if Visa has a defense to those payments totaling 5k, debtor would not have to add 5k to the hurdle she must jump in a Chapter 13 Bankruptcy. Your local and licensed bankruptcy attorney should be much help to you in defining what a preference is and are there defenses to the preference.

 

When the time is right, or when you are ready, reach out to Minnesota’s LARGEST Chapter 7 and 13 Bankruptcy website at www.kainscott.com. You will be glad you did!

Topics: Chapter 13 Bankruptcy