Question

Agnes plans to file for bankruptcy under Chapter 7. One month prior to filing, Agnes gives Joe's Filling Station $700 to apply to her gas bill. Joe has been so kind to let her charge the gas she needed for her car over the past year. The bankruptcy trustee appointed to the case:

(A) can cancel the payment to Joe as a fraudulent transfer.
(B) cannot cancel the payment to Joe because it is payment for an existing debt.
(C) cannot cancel the payment to Joe because he is not an insider.
(D) can cancel the payment to Joe as a voidable preference.

Answer 1

Answer: D

Explanation: A primary goal of bankruptcy is to treat creditors fairly and equally. The automatic stay effectuates this goal by stopping the creditors' race for the debtor's assets. However, a debtor can usually see that he will probably file for bankruptcy at least a couple of months before he actually files and after learning about how bankruptcy works, he may try to pay some creditors over others before filing. A debtor may prefer certain creditors, because they are relatives or friends or officers of a corporate debtor, or the debtor may have a continuing relationship with the creditor, such as a family doctor, that he doesn't want to jeopardize.A preference (aka preferential transfers) occurs when a debtor transfers money or an interest in the debtor's property to a creditor that is greater than what the creditor would have received in a Chapter 7 liquidation. an avoidable preference is a transfer or payment made to a creditor by a debtor that the bankruptcy trustee later seeks to recoup for the benefit of the bankruptcy estate and repayment of the estate's creditors. This is in accordance with the priority scheme prescribed by the Bankruptcy Code as opposed to the unilateral preference of the debtor and/or the original creditor receiving the payment . Many creditors never want to enounter avoidable preference litigation because it usually means a loss of time and attorneys' fees that must be expended to defend such suits.The purpose of avoidable preference litigation and the rationale behind the term's inclusion in the Bankruptcy Code is to fairly distribute the debtor's assets to creditors in an orderly scheme.

Answer 2

Answer:

The correct answer is letter "D": can cancel the payment to Joe as a voidable preference.

Explanation:

Voidable preferences are the transfer of assets from a debtor to a creditor before the debtor files for bankruptcy. Those assets will have to be returned by the debtor to the state where the bankruptcy was requested. Voidable preferences take place when the transfer is regarding a debt prior to the filing for bankruptcy and when the debtor's financial situation is insolvent (90 days before filing the request).