Question

On November 12, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code. Prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions. On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding. On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent. On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon. The mortgage debt of approximately $220,000 was properly recorded and the house had a fair market value of $245,000. Drowner’s car is worth $11,000. Drowner’s attorney should advise Drowner that:

A) The money seized by his former landlord constitutes a preferential transfer.

B) The money paid on his car note constitutes a preferential transfer.

C) The money paid to his mortgage company constitutes a preferential transfer.

D) All of the above payments and seizures were preferential transfers.

Answer 1

Answer: A) The money seized by his former landlord constitutes a preferential transfer.

Any transfer involving money or property(including a lien of property) even if it is voluntary or involuntary, should be set aside as preferential by the trustee if the transfer improves the transferee's position.

The seizure of Drowner's bank account by the landlord is such kind of a transfer because it improves landlord's position.

The creditors for car and mortgage payment are fully secured and on sale of the collateral they would receive full amount even in case of bankruptcy. These creditors do not improve their positions on account of transfers.