Legal Definitions - subsequent-advance rule

The subsequent-advance rule is a principle in bankruptcy law that allows a creditor to keep a preferential transfer made by the debtor if certain conditions are met.

According to the rule, a preferential transfer will not be avoided or rescinded by the debtor's bankruptcy trustee if:

1. The creditor extended new value to the debtor after receiving the preferential transfer
2. The new value is unsecured
3. The new value remains unpaid after its transfer

For example, let's say a debtor owes money to a supplier and makes a payment to them shortly before filing for bankruptcy. The bankruptcy trustee may try to recover that payment as a preferential transfer. However, if the supplier later extends new credit to the debtor and that credit remains unpaid after the bankruptcy filing, the subsequent-advance rule would apply and the trustee would not be able to recover the earlier payment.

Another example could be a bank that has a security interest in a debtor's property. If the debtor makes a payment to the bank shortly before filing for bankruptcy, the trustee may try to recover that payment. However, if the bank later extends new credit to the debtor and that credit remains unpaid after the bankruptcy filing, the subsequent-advance rule would apply and the trustee would not be able to recover the earlier payment.