Bankruptcy Alphabet-T is for Transfers

The Bankruptcy Alphabet is soon drawing to a close, but it is important to discuss what seems to be a growing issue with a lot of people who meet with me as of late, transfers of property.
Bankruptcy Alphabet-T is for Transfers

                               T is for Transfers

Photo by Leo Reynolds

Transfers are defined broadly in the Bankruptcy Code to pretty much include every transaction in which a Debtor either surrenders an interest or in which another party retains an asset of the Debtor through a security interest. 11 U.S.C. §101(54).

Transfers are important in the landscape of bankruptcy because they can be voided by the bankruptcy trustee or debtor in possession. The following is only a short outline of the type of transfers that can be voided and only caters to Chapter 7 liquidation cases and Chapter 13 reorganization cases.

Preferential Transfers
Preferential transfers are those transfers where it appears that the debtor was making the transfer to benefit a particular creditor. Sometimes this occurs when a debtor feels obligated to pay a medical debt to their family doctor or dentist, but all too often involve payments made to family members.

We can see the point of preference transfers. Why should one creditor get paid when the others do not? The preference doctrine allows the trustee to put all general unsecured creditors on an even footing by avoiding the transfers and evenly paying unsecured creditors with the funds given to the favored creditor.

Avoiding preferential transfers are governed by 11 U.S.C. §547. It allows a trustee to avoid any transfer of interest of the debtor’s interest in property if such a transfer was:

  1. To or for the benefit of a creditor;
  2. for or on account of a debt owed by the debtor before the transfer was made;
  3. made while the debtor was insolvent;
  4. made within 90 days of filing bankruptcy or a transfer made within 1 year to insiders (relatives or business partners);
  5. that allows the creditor to receive more than it would have with a liquidation under a Chapter 7 and the transfer had not been made.

A creditor should analyze the situation to determine whether the debtor was in fact insolvent and whether the creditor would have received more than it would have under a Chapter 7 liquidation.

There are exceptions to the required elements. The following transfers, despite being a preference, will be excepted:

  1. A contemporaneous exchange- This is basically an exchange of goods or services for payment at nearly a simultaneous exchange;
  2. Repayment of Ordinary Debt- Ordinary debt is the usual debt that is incurred by a debtor and the creditor. An example could be a situation where a debtor pays monthly for electricity to the electric company;
  3. Perfected Purchase Money Security Interests- Payment to a creditor for a good who simultaneously perfects a lien against the property;
  4. Subsequent Advance- If a creditor, after receiving payment, decides to advance another loan to debtor, the payment will be excepted from avoidance, however, the advanced loan will likely be discharged;
  5. Floating Security Interests- A somewhat confusing exception requiring significant mathematical and accounting skills. Basically, a creditor is only protected based upon the amount it has secured on the inventory or accounts receivable of the debtor;
  6. Non-Avoidable Statutory Liens- Payments made to a creditor for a statutory lien that cannot be avoided are excepted;
  7. Domestic Support Obligations- Payments for alimony or child support are excepted;
  8. Minor Individual Debts- Transfers that are less than $600 for individual debtors are excepted;
  9. Minor Non-Consumer Debts- Transfers that are less than $5,850 (until 2013) in business bankruptcies are excepted.

Fraudulent Transfers
Fraudulent transfers are those where a debtor’s interest was transferred to another for the purpose of frustrating a creditor’s efforts to collect a debt and when a debtor transfers a property interest for less than the value of the property when the debtor is experiencing financial stress.

Avoiding fraudulent transfers is governed by 11 U.S.C. §548. It allows a trustee to avoid the transfer, if within 2 years before a bankruptcy filing:

  1. The debtor transferred or incurred a debt with the actual intent to hinder, delay or defraud any entity the debtor was indebted to;
  2. The debtor received less than a reasonable equivalent value in exchange for such a transfer a) while the debtor was insolvent; b) for which the property remaining with Debtor was unreasonably small capital; c) intended to incur debts that would be beyond Debtor’s ability to pay; or d) made to or for the benefit of an insider under an employment contract and not in the ordinary course of business;
  3. Charitable contributions in excess of 15% of Debtor’s gross income in the year the transfer was made unless the transfer was consistent with Debtor’s contribution practices.

Post-Petition Transfers
Post-Petition transfers are those that occur after the filing of the bankruptcy petition. The trustee can avoid post-petition transfers of property that are included in the bankruptcy estate. It doesn’t apply to property not within the estate.

Avoiding post-petition transfers is governed by 11 U.S.C. §549. It allows the trustee to avoid a post-petition transfer if:

  1. The transfer took place subsequent to the bankruptcy filing;
  2. The transfer involved property of the estate;
  3. The debtor voluntarily or involuntarily transferred the property, and the transfer was authorized only by certain statutes or unauthorized.

The usual example is when a creditor repossesses a vehicle with equity or forecloses on real property without permission from the Bankruptcy Court.

Transfers are an important aspect of Bankruptcy and should be reviewed by an experienced and knowledgeable bankruptcy attorney.

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