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Bankruptcy Lawyer Discusses How A New Jersey Bankruptcy Trustee Avoids a Transfer as a Preference

New Jersey Attorney Explains How Bankruptcy Trustee Avoids A Transfer As A Preference

As I explained in a separate blog, a New Jersey Bankruptcy Trustee has seven Avoidance Powers that provide the right to avoid (cancel) specific types of transfers made by the debtor.  The bankruptcy code, 11 U.S.C. § 547, permits the trustee to avoid (cancel) any transfer of interest in the debtor’s property that was made: to or for the benefit of a creditor; for or on account of an antecedent debt owed by the debtor before such transfer was made; while the debtor was insolvent; and within the ninety (90) days prior to the bankruptcy filing; and the transfer enables the creditor to received more than such creditor would have received if the transfer had not been made.

A transfer may not necessarily mean that the debtor transferred property to a creditor. A transfer may also mean that a creditor obtains a better interest in the debtor’s property, such as converting an unsecured interest into a secured interest. An example of a transfer is a creditor gaining a benefit by filing a lien against the debtor’s property, in connection with a prior debt owed to the creditor.

The following is an explanation of the criteria. “for or on account of an antecedent debt owed by the debtor before such transfer was made” means that the debtor previously owed a debt to the creditor prior to the time of the transfer. If the debtor sold property and received money for the property, the transfer is not avoidable, as no previous debt was owed to the creditor. The following example meets the criteria of a transfer that relates to an antecedent (prior) debt. A bank account levy and removal of funds, in connection with a debt that was previously due to the creditor, prior to the filing of the levy. In this scenario, the transfer is the filing of the levy.

All of the above listed criteria must occur simultaneously. Therefore, at the time of the transfer, the debtor must have been insolvent. Insolvent means that the debtor’s aggregate debts are greater than the total value of all of the debtor’s assets. With regard to the last criteria, if the transfer does not entitle the creditor to receive more money or an improved interest in property, than the transfer is not avoidable as a preference.

Most chapter 7 bankruptcy cases do not involve the sale of assets or the distribution of funds. In a chapter 7, the trustee will not pursue the avoidance of a transfer, if there is no asset to liquidate or money to disburse to creditors.  Typically, a chapter 7 trustee will not permit a debtor to use his power, strictly for his own benefit. Therefore, even if all of the criteria is met, but there is no distribution to creditors in the chapter 7, the trustee will not pursue the avoidance action.

In a chapter 13, the avoidance of a transfer may benefit the debtor, by reducing the amount that the debtor must pay to such creditor, if the transfer was avoided. However, this power is strictly limited to the trustee and not the debtor. Typically, the chapter 13 standing trustee will avoid a transfer if the avoidance results in a substantial benefit to creditors other than the creditor who participated in the transfer. For example, if the result of the transfer results in a substantially higher payout to numerous other creditors, the trustee will likely pursue the action. Each trustee may not permit the avoidance of a transfer that solely benefits the debtor and no other creditors by reducing his payments to the trustee.

As always, there are a number of exceptions to the ability to avoid a transfer as a preference, assuming all of the criteria are met. There are a number of exceptions to consider. One exception is the business exception. The business exception does not permit an avoidance of a transfer made in the ordinary course of business or financial affairs of the debtor, which was made according to ordinary business terms. In addition to the business exception there are many more. I would be happy to discuss how they can individually apply to your personal circumstances.

Robert Manchel, an expert NJ Bankruptcy Lawyer, may be contacted at 866 503 5655 to discuss your bankruptcy protection questions.


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