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Bankruptcy Preferences

Preferences: unfair repayment of creditors

If you have declared bankruptcy, your trustee assesses your assets and your liabilities. From this point until you are discharged from bankruptcy your trustee deals with your creditors. The law requires that all creditors are treated fairly. Preferential treatment of certain creditors, or transfers below market value, can be reviewed or set aside by the court.

What are preferences in bankruptcy?

“Preferences” are regarded as unfair payments to certain creditors. Preferences in bankruptcy refers to the transfer of assets or money to a creditor in the period leading up to filing for bankruptcy. These creditors are getting preferential treatment at the expense of the other creditors.

Preferences are often paid to family members. It is illegal to make unusually large payments if you know that you will shortly be filing for bankruptcy, as these preference transfers reduce the assets which should be fairly distributed among all eligible creditors. The law therefore allows the trustee to regain the asset or assets through the courts, and the preferential transactions are set aside.

Preferences depend on time and relationship to debtor

Transfer of assets are regarded as preferences if these preferential payments were made to creditors within 3 months of filing for bankruptcy. The time frame is increased for family members, known as “not at arm’s length creditors”. Transactions to family members could be reviewable if these transactions are made up to 5 years before bankruptcy.

Transfers of assets below their market value are also subject to Court action.