Are preference claims dischargeable in bankruptcy?
Within the past week, two different people, a lawyer and a client, have asked whether filing bankruptcy will discharge the claim of a bankruptcy trustee for recovery of a preference. The answer is yes.
One of the powers a bankruptcy trustee has is to recover preferences. Preferences are payments or transfers made by the debtor in satisfaction of a pre-existing debt. The transfer must have been made while the debtor was insolvent and within 90 days prior to the bankruptcy filing. The purpose of allowing recovery of a preference is to prevent the debtor from preferring one creditor over another. The trustee instead recovers the preferential payment and all creditors share pro rata.
Imagine that you receive a letter from a trustee in the bankruptcy case of a debtor who owes you money and made a payment to you within 90 days prior to the bankruptcy filing. If you do not turn over the preference amount, the trustee could sue you. But what happens if you file your own bankruptcy case?
Barring some extremely strange circumstances, the preference is a debt or a claim just like any other, and should be dischargeable in your bankruptcy case. The odds are that no bankruptcy will be necessary, though. If you can demonstrate to the trustee that he or she will not be able to recover if you file a bankruptcy, the trustee is unlikely to pursue the claim any further. Trustees do not generally like to expend their time and resources pursuing claims which they cannot recover.
If you receive a demand from a bankruptcy trustee for recovery of a preference, do not get out your checkbook. Instead, consult with experienced counsel who can explain to you all of the elements of a preference which the trustee will have to prove, and all of the available defenses to a preference recovery.