Legal Definitions - prebankruptcy

Prebankruptcy describes anything that occurs or exists in the period before an individual or organization officially files a petition for bankruptcy with the court.

It refers to actions, transactions, or conditions that take place prior to the formal start of the bankruptcy process. These prebankruptcy activities are often subject to review by the bankruptcy court or a trustee to ensure fairness to all creditors and compliance with legal rules.

• Example 1: A small business owner, facing severe financial distress, decides to sell a piece of valuable company equipment to a close friend at a significantly reduced price just two months before filing for Chapter 7 bankruptcy. This would be considered a prebankruptcy sale.

  Explanation: The sale of the equipment happened in the period *before* the bankruptcy petition was officially submitted to the court. Such a transaction might be scrutinized by the bankruptcy trustee to determine if it was an attempt to unfairly transfer assets before the bankruptcy process began.

• Example 2: An individual, anticipating filing for personal bankruptcy, uses their credit card to purchase several luxury items and withdraw a large cash advance in the weeks leading up to their bankruptcy filing. These are prebankruptcy debts.

  Explanation: The debts incurred from the purchases and cash advance were taken on *before* the individual filed their bankruptcy petition. The bankruptcy court may review these prebankruptcy debts to determine if they were incurred fraudulently or with no intention of repayment, which could affect their dischargeability.

• Example 3: A bankruptcy trustee, appointed to oversee a company's liquidation, reviews the company's financial records for the year leading up to its bankruptcy filing. The trustee discovers that the company made substantial payments to its CEO and certain favored suppliers while neglecting other creditors. These are prebankruptcy payments.

  Explanation: The payments to the CEO and suppliers occurred *before* the company entered bankruptcy. The trustee's investigation focuses on these prebankruptcy payments to see if they constitute "preferential transfers" or other actions that unfairly benefited some parties over others, potentially requiring the recipients to return the funds.