Preference Claims from the Creditors Point of View

Preference claims and how they are handled can come as a surprise to many creditors. You receive money for services or goods that you provided and then the customer files bankruptcy. That should have no effect on your right? Wrong. 11 USC §547 defines preferences and how they are to be treated in a bankruptcy.

What is a preference claim or preference payments? The Bankruptcy code defines a preference as:

(1) a transfer of an interest of the debtor in property;

(2) for the benefit of a creditor;

(3) for or on account of an existing debt owed by the debtor;

(4) made while the debtor was insolvent;

(5) within 90 days of the bankruptcy filing for a regular creditor or within 1 year of the bankruptcy filing to an insider;

(6) that enables the creditor to receive more than they would receive through the bankruptcy filing.

However, creditors do have a few defenses in which the payments do not have to be returned to the bankruptcy estate. The most common are listed below:

  1. If payments were made in the ordinary course of business
  2. Debt creates a security interest where new value is given so long as the security interest is perfected on or before 30 days after the debtor receives possession of the property
  3. Debtor received new value for the transfer

Why does the trustee do this? To avoid a debtor from “preferring” certain creditors and paying them back before filing while not paying others. The purpose of this law is to ensure that all creditors that are similarly situated receive equal treatment when a bankruptcy is filed.

If you are a creditor and are asked to return payment as a result of a bankruptcy, consult an attorney to see whether any of the available defenses apply to you.