What is a Preferential Transfer in Bankruptcy

One of the principal tenants of bankruptcy is that the process should be fair to creditors. This means that creditors should share equally based on claim status in the debtor’s available assets. If the bankruptcy estate has only enough assets to pay creditors five cents on the dollar, and shortly before the filing of the bankruptcy the debtor paid one creditor in full, preference law would “avoid” the “transfer” and compel the creditor to return the money received and then stand in line with the other creditors pursuant to 11 U.S.C. §547. Preference law allows the bankruptcy court to undo certain transfers. The six elements of a preferential transfer are:

1. A transfer of an interest in the debtor’s property;
2. For the benefit of a creditor;
3. For a past debt;
4. Made while the debtor was insolvent;
5. Made within ninety (90) days before the filing of the bankruptcy petition, or within one (1) year if paid to or for the benefit of an insider (a family, friend, business partner, …); and
6. That enables a creditor to receive more than what the creditor would have received if the debtor’s assets were liquidated in a Chapter 7 bankruptcy.

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