Preferential Transfers By An Insolvent Debtor: The Basics

The Bankruptcy Code aims to achieve equality of distribution to creditors who are owed money while giving an honest debtor a fresh start. It is no surprise then, that pre-bankruptcy transfers of an insolvent debtor's assets that favor one creditor over another, called preferences, are the subject of regulation and scrutiny by a trustee and other parties in interest once bankruptcy is filed.

What are preferential transfers? Preferential transfers are transfers made by an insolvent debtor within 90 days of bankruptcy. This 90-day period is known as the preference period, during which a trustee or bankruptcy judge analyzes a debtor's transfer of assets to one preferred creditor while others are not paid. Section 547 of the Bankruptcy Code empowers a trustee or debtor to reverse these preferential transfers and bring the assets back into the bankruptcy estate. Unsecured creditors and secured creditors who failed to properly or timely perfect their security interests in