Payments from a Debtor prior to a Bankruptcy Filing
Posted on: December 10th, 2013

You loaned money or provided goods or services to someone who has recently said to you, “I’m afraid I have to file bankruptcy.” You gasp, as you recall no money trees in your backyard, and that you were depending on payment from this person. You gently remind this person of this fact.  Their response, as they hand you an envelope, “don’t worry; here is the rest of what I owe you.”

“Whew,” you think to yourself, as your now-former debtor files bankruptcy a month later.

Not so fast.  Upon the bankruptcy filing of the person that you thought was your former debtor, the bankruptcy court will likely appoint a trustee of the person’s estate,* whose job it is to gather the assets and distribute them to creditors of the debtor. The Trustee has the power to come after all transfers the debtor made to any entity within ninety days prior to the filing, and in some cases, even longer than that.  These transfers are called “preferences.”  The purpose of the “preference statute” is to keep a debtor from “preferring” certain creditors just prior to filing bankruptcy at the expense of other creditors who are similarly situated.  The preference statute allows the Trustee to file a lawsuit against the recipient (you) to recover the transfer and put it in the pot to distribute to all creditors.

For the most part, the defenses to a preference action are fairly fact-specific.  If you find yourself sued for receiving a preferential transfer, call a bankruptcy specialist at the McCleskey firm to find out if one of these defenses may help you keep your money.

*Assuming a Chapter 7 liquidation.

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