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Beware of voidable preferences in bankruptcy

Many Florida businesses that file Chapter 11 bankruptcy petitions are concerned about preserving their assets and business relationships so that they can restart their business after the bankruptcy proceeding has concluded. In pursuing this goal, some businesses make a serious mistake: they make payments to creditors on debts that existed prior to the filing of the petition.

Under some circumstances, making such a payment can create what is called a “voidable preference.” Under the circumstances specified in the bankruptcy code, the bankruptcy trustee has the power to set aside any payment to a creditor that constitutes a voidable preference and reclaim the money for the bankrupt estate. Creating voidable preferences is an error that should be avoided by debtor and creditor alike.

Section 547 of Chapter 11 defines the circumstances that can create a voidable preference. This section gives the trustee the power to set aside any transfer of the debtor’s interest in property to or on behalf of a creditor or on account of an antecedent debt that existed before the transfer was made. In order to be considered voidable, the transfer must have been made while the debtor was insolvent and not more than 90 days prior to the filing of the petition. The transfer must also enable the creditor to receive more value than in the case had been filed under Chapter 7. A transfer for new value, such as inventory, is not considered to be voidable. Transfers by a debtor to a surety to secure a bond may also be considered to be voidable preferences if they fall under the circumstances described above.

The trustee’s decision to attack a transfer as voidable is not automatic. The trustee has an option to do so, but the reclaiming of the amount transferred will not happen unless the trustee takes affirmative action.

Any business that is contemplating filing a bankruptcy petition may wish to consult an experienced bankruptcy attorney before making any pre-filing transfers.

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