What's Your Preference? Exploring the Split Debate Over Debtor Credit Card Payments
As you prepare your client's bankruptcy petition to submit to the court, you need to be aware of the current debate in the bankruptcy courts concerning credit card payments as an avoidable preference. Bruce S. Nathan and Scott Cargill explore this courtroom split in their joint article published in the October edition of the American Bankruptcy Institute Journal.
In the article, Nathan and Cargill point out that courts are debating the issue of whether a debtor's payment by credit card or a balance-transfer checked issued by a credit card issuer is considered to be an avoidable preference under Section 547 of the Bankruptcy Code. This question usually arises under the following circumstances described in the article. During the preference period, the debtor directs a payment to be made to a creditor to pay down or pay off an existing debt. The debtor directs the credit card issuer to make the payment on the debtor's behalf. The key issue in this transaction being disputed among the courts is whether the payment is considered a "transfer of an interest of the debtor in property" under Section 547(b).
In a mountain of case law, the majority of courts have decided that payments made by credit cards are transfers of interest in debtor property and therefore constitute an avoidable preference. However, Nathan and Cargill point out there is a growing judicial movement to redefine this issue of preference liability. In their review of Parks v. FIA Card Services (In re Marshall), 372 B.R. 511 (Bankr. D. Kan. 2007), it is pointed out that the Marshall Court rejected the argument that a credit card payment was a transfer of an interest of debtor property and was subject to an avoidable preference because the credit card company, and not the debtor, paid the creditor. The court in Marshall reasoned that there was no transfer of an interest in debtor property to create an avoidable preference.
As the debate continues, it would be a good idea for you to make sure that you are familiar with the body of case law addressing this issue in your jurisdiction. It would also be helpful to explore decisions handed down by courts in other jurisdictions to gain a full body of knowledge on this issue.
How the courts in your jurisdiction view debtor credit card payments to creditors within the preference period will definitely play a role in whether or not your client may incur preference liability.
