Under 11 U.S.C. § 547(b)(4)(A), transfers made from the debtor's estate up to 90 days prior to filing of the bankruptcy petition are avoidable by the trustee as preferential transfers. In other words, the bankruptcy trustee can undo any such transfers because they are deemed to improperly favor the recipient over other creditors.
However, under § 547(c)(4), those transfers are not preferential if the creditor made a new loan after the borrower paid off the old loan. This exception is designed to protect revolving credit arrangements. Typically, a credit card provides a borrower with a debt limit that cannot be exceeded. If the borrower pays the full balance one month, then the next month the borrower has the full credit limit at his disposal. If the borrower has not paid the full balance, then the following month he has a correspondingly less amount at his disposal to borrow.
Hence, it is unfair for the lender if payments made prior to a new loan are undone. The lender would not have offered the new loan unless it received those payments.
An illustration: John has a $1000 credit limit. He uses $600 to make purchases in Month 1 and pays off the full balance at the end of the month. In Month 2, he makes total purchases of $800 and pays off the full balance at the end of the month. In Month 3, he makes $1000 in total purchases, but does not pay off the balance and files bankruptcy. Under section 547(c)(4), John's payments at the end of Months 1 and 2 are not preferential transfers, and the lender does not have to return the payments to John's bankruptcy estate.
