Legal Question in Bankruptcy in Virginia

Re: preference stipulation

A preference generally is a payment or transfer made within 90 days pre-petition (1 year in case of an insider) to or for the benefit of a creditor while the debtor is insolvent, which results in the creditor receiving more than it would have received in the event of a Chapter 7 liquidation. There are numerous defenses to preference claims, but I can't list them all here.

Re: preference stipulation

When someone pays a creditor ahead of others even though that creditor's debt held no higher priority (in the court of law).

Re: preference stipulation

The Bankruptcy Code permits a trustee to recover from creditors, payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process.

The policy behind the statute is to diminish the advantages that a creditor might get by litigation or by aggressive collection actions that force the debtor into bankruptcy. That is accomplished by making payments received in the 90 days before the filing recoverable in bankruptcy.

It is neither wrong on the debtor's part to make a preferential payment nor wrong on the creditor's to accept it. The preference statutes are simply an attempt to achieve equity between creditors.

You must then ask "is it a preference"?

Bankruptcy Code �547 defines a preference as

1.Payment on an antecedent (as opposed to current) debt;

2.Made while the debtor was insolvent;

3.To a non insider creditor, within 90 days of the filing of the bankruptcy;

4.That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Note that payments to a fully secured creditor aren't preferences because the creditor didn't get more than he would have in bankruptcy, where the creditor would get the value of the collateral.