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A creditor who received payment on the eve of bankruptcy may be required to return the funds. Payments made within 90 days of the bankruptcy filing may be recouped by a bankruptcy trustee (or a debtor in possession).
The creditor must have received more from the payment than comparable creditors in a similar situation would get through the bankruptcy proceedings. The statute’s objective is to limit the benefits that a creditor could obtain through legal action or aggressive collection efforts. The intention is to deter collecting efforts that may push the debtor into bankruptcy. This is achieved by making payments made within 90 days of the bankruptcy filing recoverable.
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According to California law, making or accepting a preferred payment is not improper either for the debtor or the creditor. Simply put, the preference statutes are an invention of bankruptcy law meant to promote equality amongst creditors. You are nearly always better off accepting payment and handling any attempts to recover the money after, and if, the payor files bankruptcy if you are a creditor seeking to collect from your customer.
Is it an opinion?
A preference is described in Bankruptcy Code Section 547 as:
- transfer (often cash) to settle a prior (as opposed to present) obligation;
- created while the debtor went bankrupt;
- Within 90 days of the bankruptcy filing, to a non-insider creditor
- this enables the creditor to collect a larger settlement on its claim than it otherwise would have if the payment had not been made and the claim had been settled outside of bankruptcy.
The fact that a fully secured creditor received no more than he would have in bankruptcy, where he would get the value of the collateral, means that the payments made to the creditor are not preferential.
An unsecured debt that the creditor transforms to a secured obligation by publishing a financing statement years after the transaction with which it was linked, by getting a writ of attachment, or by establishing a judgement lien may result in a non-obvious preference. The meaning of transfer under the Bankruptcy Code is highly inclusive.
The quick perfection of such liens is in the creditors’ best interests since it reduces the likelihood that the benefit of obtaining the lien would be lost in a preference recovery action during a future bankruptcy.
Objections to deeds of preference
The law lists defences to the recovery of a preference (c). They consist of:
- Concurrent transactions
- payments made on regular commercial terms in the course of business between the debtor and the creditor
- security interests used to secure debts that add additional value to the debtor’s portfolio are all examples of contemporaneous exchanges.
- subsequently extended and unpaid credit amounts.
These arguments must be made in the response to a preference complaint. The onus of proving that the transfer is covered by one or more of these defences despite the components of a preference is on the creditor.
Private preferences
The bankruptcy legislation also allows for the collection of payments on past-due claims owing to insiders such family, business executives or directors, or affiliated entities.
The trustee may review payments made to insiders within a year of the bankruptcy filing. This clause aims to stop the debtor from compensating family members and corporate decision-makers at the expense of trade creditors.
There is no assumption that the debtor was bankrupt at the time of the payment in an insider preference case. Because of this, it is more difficult for a trustee to win in trial.