Business owners facing debt often prefer paying loyal vendors or local partners before filing for relief. While these payments seem like good management, the U.S. Bankruptcy Code may view them as unfair gains over other creditors. Knowing how these transfers affect a liquidation case is key for legal compliance.
What defines a preference payment
A preference payment occurs when an insolvent debtor pays a creditor for a preexisting debt. For it to qualify, the payment must have taken place within the 90 days leading up to the bankruptcy filing. However, if the recipient is an insider, such as a family member, general partner or corporate officer, this look-back period extends to one year.
The court may examine and determine whether this payment action helped the creditor to gain more than they would have in a Chapter 7 liquidation had the transfer not taken place. These rules aim to ensure fair payout of assets among all parties in the case.
Common defenses against recovery
Trustees cannot claw back every payment made before a filing. Creditors and businesses often use legal protections to justify keeping the funds received during the look-back period. Common defenses include:
- Ordinary course of business: This defense involves demonstrating that the payments are aligned with routine business operations, following standard billing and payment patterns.
- Contemporaneous exchange for new value: This defense applies when the payment and the receipt of new goods, services, or other consideration were intended to occur at the same time and actually did so.
Apart from these two, with the help of a bankruptcy attorney, you can explore more defense options.
Managing the impact on operations
Businesses benefit from preparing for the chance that a trustee will review every financial transaction from the past months. Keeping clear records of invoices and payment dates can help show that certain transfers were valid business activities. This preparation may lower the risk of costly litigation during the bankruptcy process.
Resolving preference payment concerns
Managing the complex rules of preference claims needs a clear view of federal laws and local court trends. A bankruptcy attorney may clarify how these rules apply to certain business transactions.