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What is a voidable preference in bankruptcy?

Most entries in this blog are aimed at persons or businesses who are suffering from financial misfortune and are contemplating bankruptcy. This post is aimed at the creditors of persons and businesses on the verge of bankruptcy. When a businessman hears that one of his customers is going to file bankruptcy and leave him holding a significant unpaid debt, the first instinct is to demand payment in full. Unfortunately, the bankruptcy code includes a concept called "preference." The provision prevents debtors from giving preferential treatment to certain creditors by invalidating the payment of any pre-existing debt occurring 90 days before the bankruptcy petition filing.

Sec. 547 of the Bankruptcy Code provides a trustee with the power to set aside the transfer of interest of the debtor's property for the benefit of a creditor for an account owed by the debtor before the transfer is made. In order to be voidable, the transfer must be occur when a debtor is insolvent and on or within 90 days prior to the filing of the petition. The trustee has the power to make the creditor return the money or other consideration to the bankruptcy estate.

The statute does not affect payment of money for new value given to the creditor. In other words, the debtor can provide merchandise or a service and receive payment within the 90 day pre-filing period without triggering the trustee's right to void the transfer. Transfers made in the ordinary course of business between the debtor and creditor and are according to ordinary business terms are also exempt from the trustee's power to void the transfer.

The subject of voidable preferences can be very complex. Anyone who wishes to accept payment from a party who appears to be on the verge of bankruptcy may wish to consult an experienced bankruptcy attorney for advice on whether the transfer may be voidable and whether the payment can be made in a manner that will not allow the trustee to render it void.

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