We have already discussed how the code defines preferences both to general unsecured creditors and insider creditors, but what are the common defenses to a preference? We will cover that in this blog but first, let’s refresh our memories and make sure we know what a preference is.
If you pay a general unsecured creditor $600.00 or more within 90 days prior to filing bankruptcy, that is a preference. If you pay a family member or business partner (an inside creditor) $600.00 or more within 1 year of the bankruptcy filing, that is also considered a preference.
The trouble with a preference is the Chapter 7 trustee can claw back the preference- unless there are defenses to the preference. What are the common defenses to preferences? Section 547(c) of the Bankruptcy Code lays out the common defenses. They are:
- New Value Defense: Say you owe merchant 1k in debt. You got to merchant pay $600.00 on the debt but then proceed to charge another $600 in goods. Merchant would have a “New Value Defense” to the payment made on the debt.
- Ordinary Course of Business Defense: Say you are a merchant and you allow customers to take goods and bill them for the goods and they must pay the invoice within 30 days. Customer buys 1k worth of goods, merchant then invoices customer and customer pays within 30 days like always. Merchant would have an “ordinary course of business” defense to the preference.
If creditor has a defense to the preference, Chapter 7 trustee could not claw the preference payment back. To be sure, the issue of a whether creditor has a defense gets litigated in bankruptcy court all the time.
When the time is right, or when you are ready, reach out to Minnesota’s nicest bankruptcy law firm at www.kainscott.com. You will be glad you did!