What is the 90 day rule in Chapter 7?

The 90-day rule in Chapter 7 bankruptcy refers to the period during which a bankruptcy trustee can scrutinize and potentially recover certain payments made by the debtor to creditors before the bankruptcy case was filed. This is commonly known as the preferential transfer lookback period.

What is the 90-Day Rule in Chapter 7?

The core of the 90-day rule is designed to prevent debtors from favoring one creditor over others shortly before filing for bankruptcy. Bankruptcy law grants the assigned bankruptcy trustee the authority to look back at transactions that occurred within the 90 days immediately preceding the bankruptcy petition date.

• Preferential Transfers: These are payments made to creditors (individuals or entities to whom the debtor owes money) during this 90-day window. If a payment gives one creditor more than they would have received through the bankruptcy process, it may be considered a preferential transfer.
• Trustee's Power: The bankruptcy trustee has the power to "claw back" or recover these payments. The recovered funds then become part of the debtor's bankruptcy estate, which can be distributed more equitably among all creditors.
• Purpose: The primary goal of this rule is to ensure fairness and equality among all unsecured creditors. Without this rule, a debtor might pay off their favorite or most insistent creditors, leaving little to nothing for others.

Why the 90-Day Rule Matters

Understanding the 90-day rule is crucial for anyone considering Chapter 7 bankruptcy.

• Ensuring Fairness: It promotes the fundamental principle of equal treatment for similarly situated creditors in bankruptcy.
• Maximizing the Estate: By recovering preferential transfers, the trustee can increase the assets available in the bankruptcy estate, leading to a potentially larger distribution to all creditors.
• Potential Consequences: If a trustee identifies a preferential transfer, the creditor who received the payment may be forced to return the money to the bankruptcy estate. This can lead to complications for both the debtor and the creditor involved.

Examples of Preferential Transfers

Common examples of payments that could be considered preferential transfers include:

• Paying off a specific credit card debt in full shortly before filing.
• Making a large, accelerated payment on a personal loan to a friend or family member (who is considered a general creditor).
• Settling an old debt with a particular vendor just weeks before seeking bankruptcy protection.

Note: There are some exceptions to the 90-day rule, such as payments made in the ordinary course of business for current expenses (like utility bills or rent) or certain small, aggregate payments to non-insider creditors (typically under a specific dollar amount, which can vary). However, the general principle applies to most non-ordinary course payments.

Summary of the 90-Day Rule

For more general information about Chapter 7 bankruptcy and how it works, you can consult official resources like the United States Courts website.