December 15, 2019

What is the difference between a preference and a fraudulent transfer?

I see a possible trap for the unwary in one of the October 17, 2005 changes to the Bankruptcy Code. I do not have a firm answer to this and I welcome any suggestions or thoughts.

Bankruptcy Code Section 547 empowers the trustee to avoid a transfer (preference) between the debtor and an insider on account of an antecedant (pre-existing) debt if the payment was for a debt incurred within one year of the bankruptcy filing.

Bankruptcy Code Section 548 empowers the trustee to avoid a “fraudulent” transfer to any party within two (2) years of the bankruptcy filing – fraudulent being defined in the Code Section as essentially a transfer made with actual intent to hinder a creditor or for less than full value and made when the debtor was insolvent. Prior to October 17, the lookback period in this section was one year, not two years.

Finally, Bankruptcy Code Section 727 authorizes the Court to deny a discharge to a debtor who, with the intent of defrauding creditors or the estate, has transferred property within one year of filing.

I have a case where my potential client had borrowed assets from an insider to use as security for a bank loan. He never took out the bank loan and therefore never made use of the loan of the assets. When it became obvious that he would not need the bank loan, he then transferred that property back to the insider a year and two months ago.

The insider had requested the return of the assets once it became clear that my client would not need them. The transfer was made when the debtor was insolvent.

Does it make a difference that the debtor’s transfer was in the form of a debt repayment (vs. an outright transfer)? Is there a different standard of review if a “preferential” transfer is outside the preference period but within the fraudulent transfer period? Would this return of assets be considered “ordinary course of business.” Should I list it on Question 10 of the Statement of Financial Affairs?


About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. Anonymous says

    Assuming that the debtor you refer to is the one who returned the assets to the insider, you have to note that if the debtor merely gave back what was borrowed, it is not a fraudulent transfer under 548 because 548’s definition of value includes satisfying a present or antecedent debt. That definition of value is incorporated into “reasonably equivalent value” (see BFP). Thus, if all you do is give back what was owed, you have reasonably equivalent value in the satisfaction of a debt; you may have preferred someone but not committed a fraudulent transfer. As the Glenn treatise says, a preference is never a fraudulent transfer; see also In re AppliedTheory. Now, that is the general rule. However, please note that the UFTA treats preferences to insiders as fraudulent transfers where the insider knew of the transferor’s insolvency. Thus, depending on the applicable state law, you may have a fraudulent transfer because it was a preference to an insider, even though it was outside the federal preference statute lookback period.

  2. whether all donations made to ligitmate charties are exempt from fraudulent transfer rule in bankruptcy.


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