When you file for bankruptcy, you have to declare your assets and liabilities on your petition. It is very important that you are honest with such information on your filing. Your transactions prior to the filing are significant to your case because the trustee and the court will look into them.
There is a common concept in insolvency and bankruptcy situations called preferential transfer. Such type of property transfer can be reversed in bankruptcy so that the trustee can used it to repay creditors.
The court-appointed bankruptcy trustee is provided with extensive powers to avoid preferential transfers by requiring the preferred creditors to pay the value of the preferences or return them to the bankruptcy estate. The trustee can also remove property liens.
All transfers made within 90 days from the date of the bankruptcy filing can be avoided by a trustee. If the transferee is an insider, such as a friend or a relative, it can be avoided if the transfer happened within 12 months.
Basically there are 5 elements of an avoidable preferential transfer according to Section 547 of the bankruptcy code. All these elements should be present.
1. The transfer should have been made either to the creditor or for the creditor's benefit. The transfer of property includes money and interests in property.
2. The debtor made the transfer due to an antecedent debt, regardless if it had been incurred shortly before the transfer of asset.
3. The debtor was already having financial problems when the property was transferred.
4. The transfer occurred during the 90-day pre-petition avoidance period, which is before the date of the filing. However, the avoidance period of an insider transfer is one year. The insiders include a debtor's friend, relative, or corporate debtor. In most cases, the debtor is solvent within a few months before filing for bankruptcy. But since it is difficult to prove insolvency at a specific point in time, the debtor is presumed insolvent within the period of 90 days before the filing, though the creditor is allowed to rebut this presumption. Meanwhile, in an insider transfer, the debtor is not presumed insolvent beyond 90 days before the filing. But the trustee can try to prove the debtor's insolvency.
5. The transferee received more payment than it would have received under a distribution of the bankruptcy estate after the preference was returned. But the improvement-in-position test is not required if the creditors are secured, or if the creditor's class would be fully paid. Nevertheless, there are two issues for the secured creditors and they are related to the collateral's value, considering that if the collateral does not cover the debt in full, then the secured debt would be split into a secured debt and unsecured debt. The collateral's value is based on its market value during the bankruptcy filing
, not its value at the time the debt was incurred.
There are certain statutory defenses provided to a creditor who is a recipient of preferential payment, besides contesting that the transfer was not actually a preference. A creditor getting a preferential transfer notice must take action immediately. There are strict deadlines for answering to the court. A prompt reply to such a notice is necessary.