Understanding Avoidable Preference in Bankruptcy

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There is a little-known principle in bankruptcy called “Avoidable Preference” that could work to your detriment if not clearly understood. Let me explain. If you decide to pay off some debts in order to save certain assets from being seized by your creditor, such an action may be termed as “avoidable preference” by the bankruptcy court. “Avoidable preference” means making payment to your secured creditors to the detriment of unsecured creditors.

Suppose you have issued bounced checks to purchase certain assets like your car. You may decide to make good your bounced check before filing for bankruptcy in order to avoid repossession by your creditor. However, if such a repayment is made within 90 days of filing for bankruptcy, the bankruptcy judge may classify your payment as “avoidable preference” if he or she feels the payment gave preference to your secured creditor and jeopardized your unsecured ones. In such a case, the bankruptcy judge may order the creditor to return the payment and retain the debt in your bankruptcy estate.

However, there are exceptions to the rule. Suppose your creditor has filed a lien on your property and in order to remove the lien, you pay up your debt. If the creditor releases the lien after the bad check has been made good, the bankruptcy judge may allow the payment.

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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