Question

On November 12, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code. Prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions. On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding. On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent. On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon. The mortgage debt of approximately $220,000 was properly recorded and the house had a fair market value of $245,000. Drowner’s car is worth $11,000. Drowner’s attorney should advise Drowner that:

A) The money seized by his former landlord constitutes a preferential transfer.

B) The money paid on his car note constitutes a preferential transfer.

C) The money paid to his mortgage company constitutes a preferential transfer.

D) All of the above payments and seizures were preferential transfers.

Answer 1

Dear Friend,

In order to test whether the Transaction is a Preferential Transfer or not, we need to understand the concept of Preferential Transfer.

Preferential Transfer is defined as a payment

a. made to or for the benefit of the Creditors,

b. made while the Customer was Insolvent,

c. made on or within the period of 90 Days before the date of making the Bankruptcy Petition and so on so forth.

In the Given Case, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code on November 12 and prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions.

Transaction - 1 : On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding

Reasoning: It has satisfied the Test c as mentioned above and hence it can be said that it could be termed as Preferential Transfer.

Transaction - 2 : On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent.

Reasoning: It has also satisfied the Test c as mentioned above and hence it can be said that it could be termed as Preferential Transfer.

Transaction - 3 : On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon.

Reasoning: It has not satisfied the Test c as mentioned above and hence it cannot be said as Preferential Transfer.

Therefore, Option - A and Option - C alone can be Termed as Preferential Transfers.