Preferential Payment By Credit Card

I saw an interesting post on the Georgia Bankruptcy Law Blog edited by Scott Riddle. Outside of bankruptcy a debtor can choose to pay any creditor and avoid paying other creditors. In bankruptcy, all creditors have to be treated equally. If the debtor pays one creditor within 90 days of filing that payment is deemed a "preferential payment" which the Trustee may recover. The Trustee goes after the creditor for the money received from the debtor.

Scott’s blog discussed a Georgia bankruptcy case where within 90 days of the filing of his Chapter 7 petition a debtor used his credit card to pay $4,000 to the defendant optical company. The payment satisfied an obligation of another company, which obligation the debtor had guaranteed. The Chapter 7 trustee filed suit to recover the payment as a preferential transfer, and a motion for summary judgment. The key question was whether the payment, via credit card, constituted an interest in the debtor's property, as defined by §547(b).

The only preference element in issue was whether the transfer was of an interest of the debtor in property. Relying on definitions in prior bankruptcy cases the Georgia court found that a debtor's use of a credit card does not constitute a transfer of an interest of the debtor in property, and therefore payment by credit card was not a preferential payment. I assume the result would be different if the debtor used his own cash which otherwise would be part of the estate available to all creditors to pay the same preferred creditor within the 90 day time frame.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida