Preferences and fraudulent conveyances are two ways in which a debtor facing the prospect of bankruptcy may attempt to show favoritism to a particular creditor or close family member or associate, or even set aside some property for himself or herself to avoid losing it to the bankruptcy estate.
A preference occurs when a debtor treats one creditor more favorably than the others. If a debtor has only $500, for instance, and owes that same amount to both First County Bank and First State Bank, but the debtor pays all $500 to First County Bank, that bank has received a preference. Bankruptcy law disfavors preferences if they are made for the benefit of a particular creditor and for a debt owed prior to filing bankruptcy, if the debtor is insolvent at the time of the payment, and if payment is made within ninety days before filing (or one year, if made to an insider like a family member or an officer of a corporate debtor). Creditors receiving preferences may be required to return the amount paid to the debtor's estate, so that it can be added to all the other assets and appropriately divided among all creditors.
Fraudulent conveyances are another vehicle by which debtors may attempt to defraud creditors. The Uniform Fraudulent Transfer Act (UFTA) was enacted to remove any temptation the debtor may have to hide property before declaring bankruptcy, such as by giving it to a relative. Under the Act, any transfer of the debtor's assets within ninety days before filing bankruptcy (or one year if the transfer is to a family member or business associate) is carefully reviewed by the bankruptcy court. If the court concludes that the debtor was attempting to defraud creditors by selling property at a below-market price, for instance, the court can order that the property be turned over to the trustee. Anything sold for fair market value before the bankruptcy filing cannot, however, be recovered by the court under the UFTA.
