PREFERENTIAL PAYMENTS IN BANKRUPTCY

Certain payments made to creditors may be what the Bankruptcy code defines as a “preferential” payments. The Bankruptcy Code defines a preferential payment as follows:

- The transfer of the Debtor’s property;

- To or for the benefit of a creditor;

- For an antecedent debt owed by the Debtor;

- Made while the Debtor was insolvent (the Debtor being presumed to be insolvent within the 90-day period preceding the filing of a petition); and made within 90 days before the filing of the bankruptcy petition (or within one year if the creditor was an insider);

- That enables the creditor to receive more than such creditor would have received in Chapter 7 liquidation proceeding. 11 U.S.C. Section 547.

One of the goals of a bankruptcy is to pay creditors on a statutorily-ranked basis. The law attempts to treat each class of creditors fairly, within the class. If the debtor paid a creditor just before filing of a bankruptcy petition, the law views that creditor as being preferred, or favored, if that creditor received more than it otherwise would have in the Chapter 7 bankruptcy. A debtor, once insolvent, must avoid preferring one creditor over another.
The trustee has the power to void the preferential payment and demand that the creditor return the funds. The trustee must prove that the payment was a preferential payment, and if proved, the payment must be returned to the bankruptcy estate.
If a creditor is alleged to have received a preferential payment, the creditor may have defenses that would allow the creditor to keep the payment. Two of the common defenses are 1) a contemporaneous exchange for new value 2) payments made in the ordinary course of business. If a creditor is facing a preference claim, the creditor should review the claim to determine whether if has legitimate defenses.

About the Author:
Mike Hall is an attorney at the Idaho Business Law Group, PLLC, located in Meridian, Idaho. You can find him at idahobusinesslawgroup.com, email at mike@idahoblg.com.