Preferential Transfers in Chapter 7

April 13, 2006

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"Preferential transfers" will be brought back into a Chapter 7 bankruptcy action and included in the assets available for liquidation. These include transfers of cash or assets to insiders (family members and controlled business entities) within the year before the action is filed. For transfers to persons or entities, other than insiders, the time period is 90 days.

Ordinarily, then, transfers to insiders should be planned and carried out more than a year before the action is filed. In theory, however, bankruptcy courts can go back in time (in some cases as much as four years) and undo transfers proved to be fraudulent.

However, in practice, courts do not often go back this far. Use one year as a guideline, but plan further in advance if possible.