Free Consultation
The office is open as per the NYS Covid-19 guidelines. We are now doing both in-person and telephone consultations. Please call the office at 718-855-6840 to schedule a time to speak with one of our experienced bankruptcy attorneys.

Preferences vs fraudulent conveyances in New York: What’s the difference?

For New Yorkers involved with the bankruptcy process, whether debtors or creditors, the concepts of “preferences” and “fraudulent conveyances” often cause confusion.  (Actually, it’s not just laypeople.  They cause for confusion for many law students and even some lawyers as well.)

They cause confusion because they both often relate to attempts by debtors to keep certain assets from being dealt with in the bankruptcy process.  So here’s the nutshell version of the differences between the two:


A preference relates to a specific creditor.  A debtor (often a business debtor) wants to make sure that a certain creditor wants to get paid in full before the debtor files their bankruptcy case.  Perhaps it’s an important business relationship, or a supplier with whom the debtor is friendly.   The result would be that that creditor gets 100% of their money back rather than a pro rata share.

However, the bankruptcy process is about having an orderly process for protecting creditors as much as it is about protecting debtors.  And paying a preferred creditor back ahead of the filing means that the other creditors get paid back less as a result.  So the bankruptcy law says you can’t prefer one creditor over another.

Specifically, if a debtor makes any payment to a creditor during the 90-day period prior to the bankruptcy filing, and that payment is not within the “ordinary course of business” (e.g., a payment you make regularly for supplies you need to conduct your business), then the trustee can initiate a “preference action” to undo that transaction, take the money back from that creditor and put it into the bankruptcy estate to be divided equally among creditors.  Additionally, if the creditor is an “insider” (e.g., a family member), then the pre-filing period increases from 90 days to one year.

Preference actions may be familiar to many businesses who have dealt with a company that filed for bankruptcy.  Trustees often cast a wide net, initiating preference actions against many creditors and suppliers in an effort to increase the assets in the bankruptcy estate and shift the burden on those creditors and suppliers to demonstrate that their transaction was not a preference.

How to deal with a preference action, what constitutes “ordinary course of business” and what’s an insider are more complicated questions that should be discussed with an experienced bankruptcy attorney.

Fraudulent Conveyance:

Contrary to a preference, a fraudulent conveyance (or fraudulent transfer) is all about the debtor and its intent or actions.  Did the debtor make the transfer with the “actual intention to hinder, delay or defraud” any creditor of the debtor?  A classic example might be where a debtor gives away valuable property to a family member or other insider as a way to keep the asset away from creditors.

However, under both bankruptcy and New York law, a trustee can avoid a fraudulent conveyance even if the debtor has no fraudulent intent. The trustee just needs to show a transfer for less than fair consideration at time debtor was insolvent or debtor made insolvent by transfer.  An example might be where a debtor filing (perhaps without a bankruptcy attorney) is a little too generous in giving away valuable assets to a family member without awareness of the impact on their subsequent bankruptcy filing.

It’s also worth noting that a fraudulent conveyance action (as opposed to a preference action) can be initiated by a trustee as well as by a creditor.

Rosenberg Musso & Weiner has extensive experience dealing with preference actions, fraudulent conveyances and other trustee actions, having worked for many years on both sides of the issue.

For more questions about preference actions and fraudulent conveyances, please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

Recent Posts

Beware Grace Periods, Debtors

Too often, debtors see grace periods offered by lenders as free benefits. “Grace” makes it sound so innocent. However, debtors who routinely rely on grace periods when making payments will find themselves facing financial difficulties that might lead to bankruptcy. The reason is that although creditors offer grace periods to debtors, they also use them

Read More »

Bankruptcy May Not Rescue You From Vicious Personal Disputes

Bankruptcy is a technical process that assumes everyone working within it is mostly rational. To the extent that it expects parties to deviate from irrational behavior, the Bankruptcy Code and its accompanying rules include incentives to keep parties in line. Creditors are usually large and impersonal, and they rarely care if their debtors file bankruptcy.

Read More »

Non-Lawyers’ Explanations of Bankruptcy May Be Wrong

Do you have financial problems? Do you tend to ask your friends for advice? Is one of your friends an experienced New York bankruptcy lawyer who will explain the process for you? Are your friends otherwise knowledgeable people? The answer to these questions may be, “Yes but you don’t know it.” Although many bankruptcy lawyers

Read More »

6 Steps to Take Before Filing Bankruptcy

Leaving your case to an experienced New York bankruptcy lawyer is not the only step on the to-do list before filing bankruptcy. There are many things debtors should do (and not do) before they file, and the more organized and mindful debtors are, the easier the process will be and the more effective the result.

Read More »

Social Security Number Not Necessary for Bankruptcy

A question that’s commonly asked about New York bankruptcy is whether a debtor needs a Social Security number to file. Debtors ask because they sometimes run across the bankruptcy form title, “Your Statement About Your Social Security Numbers” (B 121), which asks debtors to list their current and prior Social Security numbers. The new bankruptcy

Read More »

How Can a Debtor (or Creditor) Get a New Trustee?

The trustee in a New York bankruptcy case is usually not the debtor’s ally. His or her purpose is mainly to administer the bankruptcy estate or ensure the debtor’s repayment plan goes according to plan. Trustees pursue preference payments, fraudulent conveyances, and other malfeasance committed by debtors. They frequently initiate adversary proceedings against debtors. In

Read More »
Scroll to Top