This transaction was made and paid in a normal way between the debtor and the car mechanic.Ĭreditors can also raise the “contemporaneous exchange” defense. The money was paid in the same way it always was, or if it was paid to the transferee according to ordinary business terms.įor example, if a person takes their car in for normal servicing, receives and pays an invoice from their car mechanic, and then files bankruptcy a month later, the bankruptcy trustee can’t take the money back from the mechanic. The debt was “incurred in the ordinary course of business or financial affairs of the debtor and the transferee,” (person or company that was paid) and Here, money paid during the preference period can’t be taken back if: One defense is the “ordinary course of business” defense. These defenses protect companies who do business with people they know don’t have money and might file for bankruptcy soon. Creditors do have some defenses they can raise to try to keep the money. When the bankruptcy trustee makes a claim for preference payments, the money isn’t automatically taken. How much money one creditor gets is based on how much they are owed. If the trustee takes money back, they will divide the money between the other people or companies you owe money to. The Bankruptcy Code does not allow trustees to collect money in consumer cases if the filer paid less than $600 during the preference period. The trustee also can’t go after every debt paid in the last 90 days or 12 months. The preference period for antecedent debt paid to non-insiders is only 90 days before the bankruptcy petition was filed. The preference period is only the 12 months before filing bankruptcy for payments made to friends and family, known as “insiders.” It’s even shorter for other unsecured creditors, like past-due utility payments or an unsecured credit card. The bankruptcy trustee doesn’t have an unlimited timeframe to work from. Second, the money must be meant to repay part of a debt that existed before the date of the payment. This money could be paid voluntarily, or it could be taken through a wage garnishment or a bank levy. There are two elements that must be present before the bankruptcy trustee can recover a payment under the preferences rule.įirst, the creditor – the person who made the loan – received money from the borrower. The bankruptcy trustee can take these payments and divide them fairly among other creditors. Preferential payments are part of the bankruptcy estate. What are the elements of a preferential payment generally This article will explore what constitutes a preferential payment and why it matters to you if you’re thinking about filing a Chapter 7 bankruptcy. Such preferential payments can be recovered by the bankruptcy trustee so the funds can be distributed to all unsecured creditors in shares. Preferential payments, or preferences, are payments made to creditors before a bankruptcy case is filed that allow the creditor to receive more than they would have been able to recover in the bankruptcy case.
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