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What is a "Preferential Transfer"? - Part One

A preferential transfer is a transfer to a creditor shortly before the debtor files for bankruptcy. Other creditors affected by the debtor’s bankruptcy have the option to sue the creditor shown prior preference for payment when: 1) a transfer exists to the benefit of the credit for prior debt; 2)the debtor was insolvent when the transfer was made; 3) the transfer was made 90 days prior to the bankruptcy filing; 4) the transfer allowed the preferred creditor to receive a larger payment than if the transfer was part of a bankruptcy filing.

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See 11 U.S.C. Section 547. Also note that the elements of an "ordinary course of business" defense were reduced from three to two as a result of 2005 amendments to the Bankruptcy Code. The date on which the bankruptcy case in which the trustee has brought a lawsuit to collect the transfer was filed will determine whether a creditor will need to prove three or two elements to prevail on this defense. The discussion contained above is intended as a simple introduction to the topic and should not serve as a substitute for the legal advise of counsel having available all of the pertinent facts and circumstances.

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