The 90 day Rule? Is There REALLY One? § 547. Preferences

[tobee43]

i found this information most interesting and wanted to share it on the blogs. i have always thought that a debtor was basically "safe" under that 90 day rule spending or buying. apparently, not? this certainly did clear up the question in my mind.


"Most of my clients arrive in my office familiar with the 90 day rule in bankruptcy. They’ve talked to friends or read on the internet. They often volunteer that they are familiar with the prohibition. Sometimes, though, they ask questions about the details of its application.

Which is all very interesting, except that there is no 90 day rule that makes any difference to debtors. Some think the rule is one prohibiting paying any bills during the run up to bankruptcy. Others think it is a rule against buying anything. Some are simply unclear how it works.

So, the only rule with a 90 day scope is a rule that allows a trustee in bankruptcy to recover payments the debtor made on legitimate debts if the payments in that 90 day period gives that creditor more than the creditor would have gotten through the bankruptcy process. These payments are termed preferences.

The rule is not one that penalizes debtor conduct. There is no downside to a debtor who pays one creditors over another. The rule may operate to the prejudice of a creditor who got more than its fair share of the debtor’s assets right before the bankruptcy case was commenced. But this is a bankruptcy specific statute. California state law is explicit that a debtor may pick and choose among his creditors, paying some and not paying others. (The unpaid creditors may have remedies under state law, but those remedies don’t include making the creditors who got paid give up their payment.)

The other reality about the trustee’s right to avoid preferential payments is that small preferences are seldom pursued by Chapter 7 trustees. By statute, payments that total more than $600 in the 90 days before filing are avoidable. But it is not economic to sue creditors to recover $600. Each trustee has her own rule of thumb about when a preference can be effectively recovered to provide a dividend to creditors, but almost assuredly, the sum is well more than $600."


TITLE 11 > CHAPTER 5 > SUBCHAPTER III > § 547


§ 547. Preferences


(a) In this section—

(1) “inventory” means personal property leased or furnished, held for sale or lease, or to be furnished under a contract for service, raw materials, work in process, or materials used or consumed in a business, including farm products such as crops or livestock, held for sale or lease;

(2) “new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation;

(3) “receivable” means right to payment, whether or not such right has been earned by performance; and

(4) a debt for a tax is incurred on the day when such tax is last payable without penalty, including any extension.

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—
(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

(c) The trustee may not avoid under this section a transfer—
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms;

(3) that creates a security interest in property acquired by the debtor—
(A) to the extent such security interest secures new value that was—
(i) given at or after the signing of a security agreement that contains a description of such property as collateral;

(ii) given by or on behalf of the secured party under such agreement;

(iii) given to enable the debtor to acquire such property; and

(iv) in fact used by the debtor to acquire such property; and

(B) that is perfected on or before 30 days after the debtor receives possession of such property;

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;

(5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of—
(A)
(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or

(ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or

(B) the date on which new value was first given under the security agreement creating such security interest;

(6) that is the fixing of a statutory lien that is not avoidable under section 545 of this title;

(7) to the extent such transfer was a bona fide payment of a debt for a domestic support obligation;

(8) if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or

(9) if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.

(d) The trustee may avoid a transfer of an interest in property of the debtor transferred to or for the benefit of a surety to secure reimbursement of such a surety that furnished a bond or other obligation to dissolve a judicial lien that would have been avoidable by the trustee under subsection (b) of this section. The liability of such surety under such bond or obligation shall be discharged to the extent of the value of such property recovered by the trustee or the amount paid to the trustee.

(e)
(1) For the purposes of this section—
(A) a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and

(B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.

(2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made—
(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time, except as provided in subsection (c)(3)(B);

(B) at the time such transfer is perfected, if such transfer is perfected after such 30 days; or

(C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of—
(i) the commencement of the case; or

(ii) 30 days after such transfer takes effect between the transferor and the transferee.

(3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.

(f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.

(g) For the purposes of this section, the trustee has the burden of proving the avoidability of a transfer under subsection (b) of this section, and the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.

(h) The trustee may not avoid a transfer if such transfer was made as a part of an alternative repayment schedule between the debtor and any creditor of the debtor created by an approved nonprofit budget and credit counseling agency.

(i) If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided under this section only with respect to the creditor that is an insider.

[justbroke]

Well, there are generally two 90 day rules. Preferences, as I will continue to inform posters on BKforum, are not really a debtor's concern, since the Trustee goes after the creditor receiving the preference. The problem that debtors have trouble with, is when the preferred creditor is a family member or close friend! (Or, perhaps even a professional such as a family doctor.)

The other 90-day rule is actually regarding the presumption of nondischargeability for purchases within 90 and 75 days for aggregate purchases of $500 or more to the same creditor, or for luxury goods and services, respectively. (11 USC 523)

I believe that this article glosses over 11 USC 523 without even mentioning the nondischargeability aspects of certain purchases.

[despritfreya]

JB,

As it relates to the non-dischargeable issue, that only comes into play if the creditor files a timely complaint. Many do not. Further, the purchase of luxury goods within the 90 days pre-petition that meet the dollar limit is simply "presumed" to be non-dischargeable - 523(a)(2)(C)(i)(I). While one might be extremely hard pressed to defeat the presumption one certainly can try.

Des.

[tobee43]

your correct as always i was just listing the § 547.: Preferences. and, i could be wrong (certainly won't be the first time,LOL!!) but the nondischargeability of certain purchases ...wouldn't that be covered under §523.: Exceptions to discharge????

where as .....§523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title

does not discharge an individual debtor from any debt—

(1) for a tax or a customs duty—

(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title

, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or


(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;


(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; or


(C)(i) for purposes of subparagraph (A)—

(I) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable; and


(ii) for purposes of this subparagraph—

(I) the terms “consumer”, “credit”, and “open end credit plan” have the same meanings as in section 103 of the Truth in Lending Act; and

(II) the term “luxury goods or services” does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.


(3) neither listed nor scheduled under section 521(1) of this title

, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection , timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection , timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;


(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

(5) for a domestic support obligation;

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty—

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection ; or

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;


(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for—

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;


(9) for death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance;

(10) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727(a)(2), (3), (4), (5), (6), or (7) of this title , or under section 14c(1), (2), (3), (4), (6), or (7) of such Act;

(11) provided in any final judgment, unreviewable order, or consent order or decree entered in any court of the United States or of any State, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreement entered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union;

(12) for malicious or reckless failure to fulfill any commitment by the debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured depository institution, except that this paragraph shall not extend any such commitment which would otherwise be terminated due to any act of such agency;

(13) for any payment of an order of restitution issued under title 18, United States Code ......(it goes on forever)

so, .etc. etc. and even MORE etc. PLUS....any of the Revision Notes that may be applicable. right??? it does get involved i know.

[tobee43]

des!! you beat me!! while i was writing

so did i, do i understand this correctly??

[justbroke]

As it relates to the non-dischargeable issue, that only comes into play if the creditor files a timely complaint. Many do not. Further, the purchase of luxury goods within the 90 days pre-petition that meet the dollar limit is simply "presumed" to be non-dischargeable - 523(a)(2)(C)(i)(I). While one might be extremely hard pressed to defeat the presumption one certainly can try.

Absolutely. I was just mentioning that, well, there is no absolute. A creditor can still file for certain purchases made, on credit, within the presumption period, and probably succeed; unless it's for necessities. Most don't, just as you mentioned Des.

I am still under the presumption that most creditors don't file, but I've been reading too many of these posts lately with complaints filed under non-dischargeability. For me, I would still caution my fellow debtors that spending on credit cards within the 90-days certainly does open them up to potential litigation and non-dischargeability. (Of course with the standard disclaimers around which types of charges are done within that 90-days.)

[tobee43]

justbroke: For me, I would still caution my fellow debtors that spending on credit cards within the 90-days certainly does open them up to potential litigation and non-dischargeability. (Of course with the standard disclaimers around which types of charges are done within that 90-days.)

personally, i can even imagine myself charging or buying anything for that 90 day period prior to filing. it certainly would concern me that i would end up in litigation over it...although, as you have pointed out most creditors don't file. it's something i wouldn't want to even think about; so why tempt fate?

[tobee43]

Well, there are generally two 90 day rules. Preferences, as I will continue to inform posters on BKforum, are not really a debtor's concern, since the Trustee goes after the creditor receiving the preference. The problem that debtors have trouble with, is when the preferred creditor is a family member or close friend! (Or, perhaps even a professional such as a family doctor.)

The other 90-day rule is actually regarding the presumption of nondischargeability for purchases within 90 and 75 days for aggregate purchases of $500 or more to the same creditor, or for luxury goods and services, respectively. (11 USC 523)

I believe that this article glosses over 11 USC 523 without even mentioning the nondischargeability aspects of certain purchases.

sorry jb...i was just seeing § 547 when i was reading your post and not the 523 in your post?? i'd like to say i need more coffee, but, the truth is, i should have read that more carefully!!

please forgive me.