Adversary Proceedings due to Preferential Transfers in Bankruptcy

An adversary proceeding is a separate proceeding or lawsuit brought within a bankruptcy case.  It is like have a court case within the bankruptcy case.  Like a civil lawsuit, the adversary proceeding begins with the filing of a formal complaint and formal service of process (service of the documents) on the parties being sued.  One reason why adversary proceedings might be initiated during a bankruptcy case is for preferential payments, not to be confused with fraudulent transfers.  The Bankruptcy Trustee can use the adversary proceeding to recover preferential payments that were made prior to filing for bankruptcy.

What is a Preferential Payment in Bankruptcy?

Preferential payments are payments or transfers of money or property to creditors that can be construed as unfair to other creditors prior to filing bankruptcy.  For example, a preferential payment can be a payment made to a family member to pay back a loan prior to filing for bankruptcy.  There are two main types of preferential payments discussed below.

Preferential Payments made within 90 days of bankruptcy

When you file bankruptcy, a bankruptcy trustee can recover payments to a creditor totaling over $600 in the 90-day period prior to filing for bankruptcy if it is unfair to other creditors.  In other words, if the creditor received more money than they would have received in your bankruptcy, then it is a preferential payment.

Preferential Payments made to insiders within a year of filing bankruptcy

The preferential payment rule also governs payments to family members.  It is important to note, that the look back period for preferential payments to insiders is one year prior to filing for bankruptcy.  This idea closely relates to fraudulent transfers.  The bankruptcy rules do not want Debtors (the person filing for bankruptcy) to transfer their money, assets, property and equity to friends and family members prior to filing for bankruptcy.  These actions make it seem like a Debtor is hiding or transfer assets in an attempt to hinder, delay or defraud creditors, the bankruptcy trustee and the Court.

Contact a bankruptcy attorney for more information.