Preference or Fraudulent Transfer: Why Can the Trustee Undo a Pre-Bankruptcy Payment?
Both rules can unwind pre-bankruptcy transfers, but they target different problems.
Preference
A preferential transfer generally involves payment or value given to a creditor for an existing debt during the applicable pre-bankruptcy period while statutory conditions are met.
Fraudulent transfer
A fraudulent transfer can involve actual intent to hinder creditors or a transfer for less than reasonably equivalent value when other statutory conditions are present.
Insiders
Transactions involving insiders can receive special scrutiny and different lookback periods under applicable law.
Avoidance
If a transfer is avoidable, the bankruptcy trustee can seek recovery for the benefit of the estate.
The takeaway
Preference rules address unequal creditor treatment shortly before bankruptcy. Fraudulent-transfer rules address transfers made with improper intent or for insufficient value under the applicable standards.
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FAQ
Is every payment before bankruptcy a preference?
No.
Does fraudulent transfer always require actual fraud intent?
No. Constructive standards can also apply.
Can insider status matter?
Yes.