Avoiding Preferential Transfers When The Bankruptcy Trustee Doesn’t

May 22, 2023   |   Posted by: Admin

With few exceptions, when an unsecured creditor has received one or more payments or other transfers totaling at least $600 from an individual consumer debtor within 90 days prior to a bankruptcy filing, the creditor has received what is known as a “preferential transfer”.

Section 547 of the U.S. Bankruptcy Code authorizes the bankruptcy trustee to file an “adversary complaint” against the creditor to “avoid” the preferential transfer and recover the funds for the benefit of the debtor’s bankruptcy estate. Interest at the maximum legal rate from the date of the transfer can also be recovered in many jurisdictions.

At least 2 or 3 times a month, I encounter a case where a debtor has had their wages or bank account garnished within 90 days prior to filing bankruptcy. Sometimes the debtor’s wages have been garnished for several months before they finally decide, or can afford, to file bankruptcy.

In my experience, most chapter 7 trustees don’t file a complaint to avoid and recover a preferential transfer against a garnishing creditor where the aggregate amount of the transfer is less than a few thousand dollars. Some trustees might. However, if the debtor has sufficient exemptions available to exempt the garnished funds, and claims the funds as exempt in their bankruptcy schedules, you can rest assured that the trustee is not going to lift a finger to go after the transfers.

Bankruptcy Code Section 522(h) provides that the debtor can avoid a preferential transfer or setoff if the trustee doesn’t. However, unlike the trustee, the debtor cannot avoid a “voluntary” preferential transfer — only an “involuntary” transfer which was the result of a wage or bank garnishment, etc.

I’ve filed quite a few complaints to avoid and recover preferential transfers against garnishing creditors in chapter 7 cases and, so far, every creditor has settled immediately without even filing a response to the complaint. Each “settlement” resulted in the creditor returning 100% of the garnished funds during the 90-day preference period. Not one creditor put up a fight, an argument, or even filed a response to the complaint. Most thought they were getting a bargain by not having to pay interest or court costs, although debtors don’t have to pay a filing fee or incur any service of process fees to file an adversary complaint. An attorney for one creditor actually thanked me for educating her on preferential transfers before she sent out the check.

I’m surprised that I don’t see more bankruptcy attorneys filing preferential transfer complaints against garnishing creditors. It’s as simple as claiming the garnished funds as exempt, uploading a standard preferential transfer complaint via the CM/ECF, then serving a copy of the summons and complaint on the garnishing creditor by mail. Wait a week, get a check, file a dismissal.

Attorneys can amend their existing retainer agreement, include an addendum, or have a separate retainer agreement, that gives them up to a 40% contingency fee on a preferential transfer recovery (possibly more, depending on state bar or other rules in their jurisdiction). The average recovery has been around $1,800 to $2,200 per case. It’s an easy $700 to $1,000 in extra fees for not much work. Debtors are happy to pay it, since this is lost money to them anyway.

Unlike in some business cases, garnishing creditors in consumer cases have no defense to a preferential transfer claim — none that I can think of anyway (and apparently none that they have thought of so far). It’s just money there for the taking. File the complaint – get the money.

Bankruptcy case law also states that preferential transfers to federal agencies, such as the IRS, SBA, etc. are also subject to recovery, although you should check the case law in your jurisdiction.

Anyone that wants an editable copy of the preferential transfer complaint that I use, feel free to contact me and I’ll email it to you. It can be used in any jurisdiction, although some minor edits might be necessary to comply with your local rules of practice and procedure.