Providing Solutions

What is a preferential transfer and how does it work?

On Behalf of | Dec 1, 2021 | Creditors' Rights |

Residents of Texas and elsewhere have certain rights regarding their debt. While bankruptcy might be the best option to alleviate debt, there is an alternative that can be used first. A preferential transfer may be able to help debtors.

What is a preferential transfer?

Under federal bankruptcy law, a preferential transfer is an option available to debtors before they file bankruptcy. It takes place within 90 days before bankruptcy and gives an individual who is unable to pay back their debt the chance to transfer property to a creditor. Under the laws of bankruptcy, this gives the person the opportunity to alleviate some of their debt while later being able to reclaim the property from the creditor through their estate.

What is the purpose of a preferential transfer?

Preferential transfers may be recovered to prevent a debtor from unfairly favoring certain creditors over others. It also gives people who are heavily in debt the chance to financially recover. Creditors don’t have to scramble to collect assets from a debtor as the process makes things more orderly.

There are certain elements that must be in place for a preferential transfer to take place. The transfer has to be done to benefit the creditor and must be made toward an account that already has amassed debt. The person who owes the debt must also have no foreseeable way of satisfying that debt to the creditor.

Preferential transfers must take place within 90 days of filing for bankruptcy. However, if the creditor is an insider, someone who has the ability to control the debtor’s activities, that 90 days can be extended up to one full year.

The preferential transfer allows the creditor to recover more than they would have if they had relied on being paid back through a Chapter 7 bankruptcy filing. After bankruptcy, a debtor may replenish their estate by using their preference recovery powers to recover some the payments made just before bankruptcy.