Bankruptcy Preference Claim
A bankruptcy preference claim is a legal action taken by a bankruptcy trustee to recover certain payments or transfers made by a debtor to creditors within a specified period before the debtor filed for bankruptcy. The purpose of these claims is to ensure equitable distribution of the debtor’s assets among all creditors and to prevent any preferential treatment of certain creditors over others.
Bankruptcy preference claims typically arise under the U.S. Bankruptcy Code, specifically Section 547. According to this section, a transfer is considered a preference if it meets the following criteria:
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Transfer of Property: The debtor transferred property (which could include cash, checks, or other assets) to a creditor.
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Within a Specified Timeframe: The transfer occurred within 90 days before the bankruptcy filing, or within one year if the creditor is an insider (such as a relative or an entity controlled by the debtor).
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Benefiting the Creditor: The transfer enabled the creditor to receive more than they would have received in a Chapter 7 liquidation proceeding, meaning they were paid more than their proportional share in the bankruptcy process.
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Debtor’s Insolvency: The debtor was insolvent at the time of the transfer, which means their liabilities exceeded their assets.
For example, if a debtor made a $10,000 payment to a creditor just weeks before declaring bankruptcy, and that payment allowed the creditor to receive more than they would in the bankruptcy process, the trustee could pursue a bankruptcy preference claim to recover that payment. The recovered funds would then be redistributed among all creditors in accordance with the priorities established by bankruptcy law.
Overall, bankruptcy preference claims serve to maintain fairness in the bankruptcy system by preventing the debtor from favoring specific creditors before filing for bankruptcy.
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