What is the Bankruptcy 90 Day Rule?

If you have transferred property or money to a creditor within 90 days or an insider (i.e., relative or friend) within a year of your bankruptcy filing, you should be aware of the 90 day bankruptcy rule.  It is crucial that you discuss any transfers of property that you have made with your bankruptcy attorney so that you may protect any meaningful transfers you have made.

The bankruptcy 90 day rule relates to the debts that a filer has paid in the last 90 days prior to their bankruptcy filing.  Section 547(b) of the Bankruptcy Code establishes the parameters of the 90 day rule:

“… 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 a 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…” unless the amount was for less than $600 (see section 547(c)(8)).

What does this mean?  It means that the trustee may avoid a transfer made to a creditor and/or insider if you have transferred any property that has an aggregate value of $600 or more, and

1)      the transfer was made within 90 days of your bankruptcy filing, or

2)      the transfer was made within 90 days to one year if the creditor is an insider (i.e., relative or friend).

Example 1:  John wanted to try to settle his debts before filing bankruptcy.  He had saved about $5,000 to help him negotiate with his creditors.  He was successful in settling only two of his debts and paid $600 on July 30, 2013 to Company A and $4,400 on August 5, 2013 to Company B.  After negotiating these settlements he was unsuccessful in settling any of his other debts so he filed chapter 7 on August 15, 2013.  Since John paid $600 to Company A, and more than $600 to Company B, the trustee may seek to avoid these transfers and get the money back.  This will allow all John’s creditors to receive an equal share of the funds and prevent one particular creditor from benefiting more than others.

The second part of the rule allows the bankruptcy trustee to avoid any transfers of property made to any creditor that is also an insider (i.e., relative or friend) made between 90 days and one year of your bankruptcy filing date and exceeds and aggregate value of $600 or more.

Example 2:  Sarah bought her daughter Kim a car for graduating college and paid $16,000 from funds she kept in her savings account.  After buying the car, she transferred the title to her daughter on May 20, 2013, as a gift for her graduation.  In July 2013, Sarah lost her job and was unable to pay her debts due to her only receiving unemployment income.  After four months with no job, Sarah decided to file chapter 7 to receive a fresh financial start.  If Sarah were to file for bankruptcy prior to May 21, 2014, the trustee would be able to avoid the title transfer she made to her daughter.  This would put the vehicle she purchased for her daughter at risk.  It is important for Sarah to be warned about this risk prior to her filing bankruptcy.  If her bankruptcy attorney was made aware of this fact, he/she would have warned Sarah prior to her filing for chapter 7.

Keep in mind that the rule involves all property, not just cash.  There are some exceptions to this rule including if property was transferred in the ordinary course of business (i.e., the property was sold and the value you received was fair and accurate value of the property).  Also, this rule applies to both a chapter 7 and chapter 13.

If you are contemplating bankruptcy and are concerned about a transfer you have made within the last year, please talk with your local Bond & Botes office.  Any of our attorneys would be able to discuss this 90 day rule further and your options regarding any transfers that may be at risk of being avoided by the trustee.