9 Defenses a Creditor Has When the Trustee Claims a ‘Preference’ Part I of II

One thing that often happens in Las Vegas bankruptcy is the debtor pays one creditor in a certain time period before filing bankruptcy. The term for this is a “preference” because the debtor “prefers” that particular creditor over the others. Most commonly, preferences are transfers the debtor makes to people close to him or her, such as family members or business partners. The bankruptcy code mostly creates the rules that allow the Trustee to “avoid” the preference with these types of people in mind, but they apply to all creditors. The code’s goal is to ensure that all creditors are treated fairly irrespective of their relationship with the debtor. The question, though, is what options do creditors have when the Trustee claims that payments made to them are preferences and then seeks to avoid them? The bankruptcy code lists nine defenses creditors have in these circumstances, found in § 547(c) [http://www.law.cornell.edu/uscode/text/11/547].

(1)  The transfer by the debtor was for a contemporaneous exchange between the debtor and creditor for something of new value to the debtor. This defense is designed to protect transactions that were created and paid off within the 90-day period in which the Trustee can attempt to avoid most preferences.

(2)  The debtor’s payment was made in the “ordinary course of business or financial affairs of the debtor” and the creditor. This type of payment can include rent payments or utility bills. The goal is to prevent the bankruptcy code from forcing the debtor to default on some loans in the 90 days before filing bankruptcy just to ensure that preferences aren’t avoided. Another goal is to encourage creditors to work with debtors who aren’t paying their bills.

(3)  If the debtor borrows money to purchase something, and the debt is secured by whatever the debtor purchased, then any pre-bankruptcy payments to the creditor are not preferences. However the creditor must “perfect” the loan, meaning it must file its lien with the appropriate government body within 30 days.

(4)  If the debtor pays the creditor on an unsecured loan and the creditor extended new value to the debtor, any of the debtor’s payments to the creditor for that new value are not avoidable by the Trustee.

These are only the first four of nine defenses a creditor can use when the Trustee claims that a payment by the debtor is a preference. The remaining five will appear in “Part II.”

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.

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