Mark T. Young & Associates
Free Initial Consultation:
888-376-0282(Toll Free)
Focused On Your
Financial Freedom

Understanding voidable preferences in bankruptcy

When a small business in Tennessee is teetering on the edge of bankruptcy, creditors often attempt to persuade the business to pay their claims before filing a bankruptcy petition. While such a transaction may appear to benefit both the debtor and creditor, payments to creditors can often create what are known as "voidable preferences" or "preferential transfer." Such payments are often set aside by the debtor or the bankruptcy trustee, and the money paid to the creditor is returned to the bankruptcy estate.

Six factual elements must be proved by the debtor or the trustee in order to set aside a preferential transfer:

  • The existence of a transfer money or other asset to the creditor;
  • The transfer is made for the benefit of the creditor;
  • The transfer is made to pay a pre-existing debt;
  • The transferor must be insolvent at the time of the transfer;
  • The transfer was made less than 90 days prior to the filing of the bankruptcy petition; and
  • The transfer enabled the creditor to receive more value than if the transfer had been made in a Chapter 7 proceeding.

"Intent" is not one of the six elements of proving a preferential transfer, and a transfer made for the most laudable reasons can become voidable.

The most common defense to a claim of voidable preference is a showing that the transfer was made in the ordinary course of business. To use this defense, the creditor must show that the debt and the transfer typically existed between the debtor and creditor. Second, the payment must have been paid in a time and manner that was consistent with other payments. Third, the transfer was consistent with other transfers that are standard in the creditor's or debtor's industry.

No Comments

Leave a comment
Comment Information

Get Started Today

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Contact Information

Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

Toll Free: 888-376-0282
Phone: 423-933-1606
Fax: 423-877-0363
Hixson Law Office Map