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Thursday, April 23, 2015

11 U.S. Code § 547 - Preferences preferential transferes in a bankruptcy case

11 U.S. Code § 547 - Preferences

Current through Pub. L. 113-296, except 113-287113-291113-295. (See Public Laws for the current Congress.)
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(a) In this section—
(1) “inventory” means personal property leased or furnished, held for sale or lease, or to be furnished under a contract for service, raw materials, work in process, or materials used or consumed in a business, including farm products such as crops or livestock, held for sale or lease;
(2) “new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation;
(3) “receivable” means right to payment, whether or not such right has been earned by performance; and
(4) a debt for a tax is incurred on the day when such tax is last payable without penalty, including any extension.
(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and

preference in U.S. federal bankruptcy law[7] is a transfer of property by a debtor to its creditor, on account of a pre-existing debt, that is made while the debtor is insolvent[8] and gives the creditor more than it would obtain in a liquidation of the debtor's assets in a bankruptcyproceeding. It is primarily a creature of the U.S. Bankruptcy Code,[9] although some states have similar state laws. If the preferential transaction takes place within a specified period of time before the filing of bankruptcy by or on behalf of the debtor, then the debtor's trustee in bankruptcy is authorized to recover the property preferentially transferred. The mechanism of recovery is the avoidance of the transfer.[10] After such avoidance, the recovered property becomes property of the bankruptcy estate.[11] The period is usually 90 days. However, if the preferential transfer is made to an "insider," then the period is one year. An "insider" is generally a relative or one who has the ability to control the activities of the debtor.[12] The Bankruptcy Code provides some exemptions from these rules to accommodate transfers intended to be contemporaneous, made in the ordinary course of business or to the extent they are made for new value, and others.[13]
All of the following examples assume that the requirements for a preference that are set out above exist at the time the transfer is made.
  • Securing a previously unsecured debt.
  • Substituting property of greater value as security for existing security property whose value is insufficient to completely secure repayment of the debt.
  • Paying some but not all unsecured creditors.
  • In a real estate transaction, delaying the recording of a mortgage for more than 30 days after the debt it secures is created.[14]

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