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Identifying and Overcoming Preferential Payments in Bankruptcy

One of the challenges clients have when contemplating Bankruptcy, is determining what bills to pay and when. Learn the basics about preferential payments and how to avoid them.

By:  Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC

One of the challenges clients have when contemplating Bankruptcy, is determining what bills to pay and when.  The timing of the payments is important, because the Bankruptcy Trustee can recover back from a creditor certain payments made by the Bankruptcy Debtor, which are later determined to be a “Preferential Payment” by the Bankruptcy Court.  Bankruptcy Attorney Todd M. Gers explains the basics about Preferential Payments.

 

What are “Preferential Payments”?

“Payments a debtor made shortly before filing Bankruptcy.  The logic is that one or more creditors was treated preferentially as compared to the other creditors, and received more than other similar creditors will receive through the Bankruptcy process,” says Gers.

 

 

Section 547 of the Bankruptcy Code provides that a preference occurs when:

  • the insolvent debtor transfers property to a creditor worth more than $600 for an antecedent or past debt;

 

  • the creditor receives more than it would in a Chapter 7 bankruptcy;

 

  • the transfer or payment was made within 90 days before the bankruptcy filing (or within 1 year if the creditor is an insider, such as family).

 

“Clients don’t always understand the consequences of preferential payments until it is too late.  They think they are helping the situation by reducing the amount of their debt, when in reality, the Trustee can invalidate that payment and recover the property or money for the benefit of the Bankruptcy estate.”

 

Not all payments made by a debtor in advance of filing Bankruptcy are invalidated as preferential payments. There are some defenses that the creditor can assert to prevent the Trustee from recovering the payment.

 

 

Defenses to Preference Actions:

Defenses to the recovery of a preference are found in 11 U.S.C. 547(c).  They include:

  • contemporaneous exchanges for new value given;

 

  • payments made in the ordinary course of the business of the debtor and the creditor or made pursuant to ordinary business terms;

 

  • security interests that secure debts that bring new value to the debtor;

 

  • amounts of subsequent credit extended and unpaid.

 

“When the Trustee files a preference action against a creditor the burden of proof lies with the creditor to establish that although the payment meets the elements of a preferential payment, the transfer is protected by one or more of these defenses.  Generally the creditor hires legal counsel to assert these defenses and attempt to protect the payment he or she received from the debtor.”

 

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Todd M. Gers is a licensed attorney in Michigan and Illinois, and the Managing Member of the Law Offices of Todd M. Gers, PLC, located in Novi, MI.  Prior to starting his own practice in 2006, Todd worked for some of the largest law firms in Southeastern Michigan  the first 5 years of his legal career.  Todd’s legal experience includes financial crisis management, general business and corporate law, contract drafting and negotiations, real estate, secured and non-secured financing, loan work-outs, corporate restructuring, bankruptcy (representing debtors and creditors), and estate planning. For more information, visit his website.  

 

Lori T. Williams is a 23 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.

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