One of the more demanding, day-to-day aspects of running a business is collecting on accounts receivable. If a customer files bankruptcy, the situation can become more frustrating, and complicated. The customer is now formally a “debtor,” you are a “creditor,” and the realm of “bankruptcy preferences” becomes a reality.
Bankruptcy preferences can be infuriating to deal with, whether pre-litigation or after an action has been formally commenced in bankruptcy court. Services have been provided and payment has been remitted, yet the creditor is now informed that payment must be returned to the debtor’s bankruptcy estate. On the surface, “preferences” do not discriminate – the transfer of an interest of the debtor in property for the benefit of a creditor on account of a prior debt while the debtor was insolvent, and with such transfer occurring within 90-days preceding the bankruptcy filing, is considered a preference. The transfer must have enabled the creditor to receive more than what the creditor would have received if the debtor had filed a chapter 7 bankruptcy. If these elements are met, the transfer is a preference, and the transfer must be returned to the debtor’s bankruptcy estate.
There exist several defenses to preference demands, however, including the “ordinary course of business,” “subsequent new value,” and “contemporaneous exchange for new value” defenses. Each defense is unique in application and involves a detailed review of the facts between the creditor and the debtor. Prevailing on one of these defenses can directly impact the creditor’s exposure to the debtor’s bankruptcy estate. With over 55 years of combined experience, our lawyers are well-positioned to assist and advise creditors in defending against preference actions.