§ 1406 Bank Creditor Payment Restrictions

• •A “creditor” includes anyone who has deposited money with the bank.
• •“Insolvency” means the bank can’t pay its debts when they’re due.
• •After becoming insolvent—or thinking it will become insolvent—a bank can’t pay or secure a creditor if it’s trying to avoid Chapter 7 bankruptcy rules or to give one creditor a better deal than others.
• •Any payment that breaks this rule is void (it’s treated as if it never happened).
• •The rule doesn’t apply to transactions that are allowed under Sections 1463 or 1465, or to normal everyday business deals the bank makes.

A bank that can’t meet its loan payments decides to give a big cash payout to a big depositor right before filing for bankruptcy, hoping to keep that depositor happy and keep the bank’s money out of the bankruptcy pool.

Because the bank is already insolvent (can’t pay its debts) and the payment is meant to keep the money away from the Chapter 7 bankruptcy process and to favor that one depositor, the law says the payment is illegal and will be treated as if it never happened.