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What Is Section 547 (Bankruptcy Code)?

  • Trustees can reclaim payments made to creditors within 90 days before filing for bankruptcy to ensure equal treatment.
  • This law, targeting preferential transfers, aims to prevent any creditor from receiving more than they would in a Chapter 7 liquidation.
  • Contact The Credit Pros for a free consultation to understand how Section 547 could affect your credit and get assistance with any bankruptcy-related queries.

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Trustees can claw back certain payments to creditors within 90 days before bankruptcy filing under Section 547 of the Bankruptcy Code. This ensures fair treatment for all creditors and stops favoritism.

The law targets "preferential transfers" - payments for existing debts when the debtor was broke. Key points include:
• Timing: 90 days for most creditors, 1 year for insiders
• Debtor's insolvency
• Whether the payment gave the creditor more than they'd get in Chapter 7 liquidation

Worried about preference claims? Don't sweat it. Give The Credit Pros a ring for a free, no-pressure chat. We'll look over your credit report and help you navigate this mess. Whether you're owed money or owe it, you need to know Section 547 inside out. Let us walk you through it.

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    What Is Section 547 Of The Bankruptcy Code

    You can use Section 547 of the Bankruptcy Code to claw back "preference" payments made to creditors within 90 days before filing for bankruptcy. This law ensures a fair distribution of assets among all creditors by redistributing recent payments.

    To be classified as a preferential transfer under Section 547(b), the payment must:

    • Go to a creditor
    • Be for a pre-existing debt
    • Be made while you were insolvent
    • Occur within 90 days before bankruptcy (or 1 year for insiders)
    • Allow the creditor to receive more than they would in a Chapter 7 liquidation

    The aim is to:

    1. Ensure equal distribution among creditors
    2. Discourage aggressive collection efforts against insolvent debtors

    However, creditors have defenses under Section 547(c), including:

    • Contemporaneous exchange for new value
    • Ordinary course of business payments
    • Subsequent new value provided to you

    The ordinary course defense applies if the payment was:

    • For a debt incurred in the ordinary course of business
    • Made in the ordinary course or according to ordinary terms

    Courts consider factors like payment history and industry norms to determine if transfers qualify for this defense.

    To sum up, Section 547 helps create fairness in bankruptcy by recovering preferential payments, while still allowing protections for regular business transactions.

    How Does Section 547 Define Preferential Transfers

    Section 547 of the Bankruptcy Code defines preferential transfers as specific payments or transfers made by a debtor. You need to know these key elements:

    1. The transfer was made to or for the benefit of a creditor.
    2. It was for an antecedent debt (money owed before the transfer).
    3. The debtor was insolvent at the time.
    4. It occurred within 90 days before the bankruptcy filing (or 1 year for insiders).
    5. It allowed the creditor to receive more than they would in a Chapter 7 liquidation.

    The law aims to prevent favoritism among creditors and ensure fair distribution of the debtor's assets. You should know that the trustee or debtor-in-possession can "claw back" these payments to redistribute them equitably.

    To summarize, focus on:
    • Scrutinizing transfers made within 90 days.
    • Presuming the debtor's insolvency.
    • Ensuring the creditor received more than in a liquidation scenario.

    To finish, understanding these elements helps you identify potential preference issues in bankruptcy cases.

    What Are The Key Elements Of A Preference Claim

    The key elements of a preference claim in bankruptcy include:

    1. Transfer of property: You transferred something of value to a creditor.
    2. Pre-existing debt: The transfer was for an old debt, not a new one.
    3. Insolvency: You couldn't pay your bills when the transfer happened.
    4. Timing: The transfer occurred within 90 days before filing bankruptcy (or 1 year for insiders).
    5. Larger sum: The creditor received more than they would've in a Chapter 7 liquidation.

    These elements prevent debtors from favoring certain creditors before bankruptcy. However, you have defenses:

    • Contemporaneous exchange: You gave new value at the same time as receiving payment.
    • Ordinary course of business: The payment was part of normal operations.
    • Subsequent new value: You provided additional goods/services after receiving payment.
    • Small transfer: Some payments below a certain amount are exempt.

    To protect yourself:

    • Watch for signs of customer financial trouble.
    • Request cash upfront when possible.
    • Consider taking security interests in delivered goods.
    • Prepare defenses early if you suspect preference risk.

    To finish, understanding these elements and defenses helps you better navigate potential preference claims in bankruptcy cases.

    What Is The 90-Day Lookback Period For Preferences

    The 90-day lookback period for preferences in bankruptcy is a critical timeframe before a filing, during which payments or transfers can be scrutinized and potentially recovered.

    Here's what you need to know about this period:

    • It applies to payments or transfers you make to creditors within 90 days before filing for bankruptcy.
    • The goal is to prevent you from favoring certain creditors over others right before bankruptcy.
    • Trustees can claw back these preferential payments to ensure fair distribution among all creditors.
    • For "insiders" like family members or business affiliates, this period extends to one year.
    • Preferential transfers are based on timing and effect, not wrongdoing.

    Not all payments within this 90-day period are automatically clawed back. Defenses include:

    • Ordinary course of business transactions
    • New value provided to you
    • Contemporaneous exchanges

    We advise you to keep thorough records of all transactions, especially if you're dealing with a financially troubled entity. This can help you defend against potential preference claims if a bankruptcy occurs.

    To finish, remember that the 90-day lookback period is a tool to promote fairness in bankruptcy, ensuring all creditors have an equal chance of recovery.

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    Why Does Section 547 Allow Callbacks Of Payments

    Section 547 allows callbacks of payments to promote fairness among creditors and prevent debtors from favoring certain creditors right before bankruptcy. This provision aims to:

    • Ensure you receive equal treatment, like other creditors in similar situations.
    • Discourage a "race to the courthouse" behavior among creditors.
    • Preserve the debtor's assets for equitable distribution.

    The 90-day lookback period gives trustees the power to review and potentially recover preferential transfers made shortly before filing. However, several defenses exist that you might consider:

    • Contemporaneous exchange for new value.
    • Ordinary course of business payments.
    • Subsequent new value provided.

    These defenses protect legitimate business transactions while still allowing the recovery of truly preferential payments. Section 547 balances creditor rights with the Bankruptcy Code's goals of equitable distribution and debtor rehabilitation.

    To finish, if you face a preference action, you should consult a bankruptcy attorney. They can help assert applicable defenses and negotiate with trustees to resolve claims efficiently.

    How Do Insiders Factor Into Preference Claims

    Insiders play a crucial role in preference claims under Section 547 of the Bankruptcy Code. For insiders, the lookback period extends to one year before the bankruptcy filing, compared to 90 days for regular creditors. This longer timeframe aims to prevent unfair advantages for those closely connected to the debtor.

    Key points about insiders and preference claims:

    • Insider definition: Includes relatives, business partners, and affiliates of the debtor.
    • Extended lookback: Trustees can examine transfers made up to one year before filing.
    • Purpose: Prevents insiders from receiving preferential treatment over other creditors.
    • Scrutiny: Insider transactions face heightened examination due to potential conflicts of interest.
    • Revolving credit: Courts assess if the insider's position improved or worsened over the year.
    • Defenses: Insiders can use ordinary course of business and new value defenses, like other creditors.

    To avoid preference issues, you should:

    • Wait one year after repayments before filing for bankruptcy.
    • Maintain clear documentation of all transactions.
    • Ensure payments align with standard business practices.
    • Avoid accepting payments that significantly improve your position.

    Bankruptcy trustees actively seek insider preferences to maximize funds for all creditors. To finish, understanding these rules helps you navigate potential preference claims and protect your interests in bankruptcy proceedings.

    How Does The New Value Defense Work

    The new value defense helps you if you're a creditor facing bankruptcy preference claims. You use this defense if you provided additional goods or services to a debtor after receiving a potentially preferential payment. Here's how it functions:

    1. Requirements:
    • You gave new value after a preferential transfer.
    • The new value wasn't secured by an unavoidable security interest.
    • The debtor didn't repay the new value with an unavoidable transfer.

    2. Benefits:
    • Encourages you to keep working with struggling businesses.
    • Increases the bankruptcy estate's value, which helps other creditors.

    3. Application:
    • Particularly useful if you are an open account creditor.
    • Offsets preferential transfers against subsequent new value provided.

    Key points to remember:
    • New value doesn't need to remain unpaid (per recent 11th Circuit ruling).
    • Careful analysis of transactions and timing is necessary.
    • This is one of several defenses available in preference actions.

    To finish, remember to consult an experienced attorney to help you navigate this complex area and ensure you assert your rights in bankruptcy court.

    What Is The Ordinary Course Of Business Defense

    The ordinary course of business defense protects you as a creditor from preference claims in bankruptcy. It applies when:

    1. The debt was incurred in the normal operations of both debtor and creditor.
    2. The payment was made either:
    • In the usual business practices of both parties, or
    • According to standard industry terms.

    To prove this defense, you need to show:

    • The transfer was consistent with past dealings between you and the debtor.
    • No unusual collection activities or changes in payment methods occurred.
    • You didn't take advantage of the debtor's financial troubles.

    Courts consider factors like:

    • Timing of payments compared to historical patterns.
    • Size and form of payments versus previous transactions.
    • Any threats to cut off supply or demands for different terms.

    You should provide thorough documentation of your business relationship and industry norms. Expert testimony on standard practices in your field can strengthen your case.

    This defense aims to encourage you to keep working with struggling companies. It safeguards routine transactions that don't unfairly favor certain creditors before bankruptcy.

    While powerful, this defense can be tricky to prove. You often need extensive analysis of payment histories and industry standards. To wrap up, it's a valuable tool for you if facing preference claims.

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    What Is The Contemporaneous Exchange Defense

    The contemporaneous exchange defense protects you, a creditor, from preference actions in bankruptcy. It applies when a debtor pays for goods or services at roughly the same time they're received. To use this defense, you need to show:

    1. Both parties intended the exchange to be contemporaneous.
    2. The exchange was actually substantially contemporaneous.
    3. The debtor received new value (like goods or services).

    Key points include:

    • Encourages you to keep doing business with struggling companies.
    • Requires proof of mutual intent, often through communications or past dealings.
    • Timing is crucial, but "contemporaneous" varies by jurisdiction.
    • New value can be goods, services, or releasing a lien (but not forbearance).

    To prepare, you should document contemporaneous exchanges before bankruptcy. Consider:

    • Putting your customers on COD terms.
    • Getting a written agreement stating payments are intended as contemporaneous exchanges.
    • Consulting a bankruptcy attorney to structure agreements properly.

    Remember, this defense is fact-specific. Courts examine factors like:

    • Burden of payment arrangements on the debtor.
    • Whether parties viewed it as essentially a cash transaction.
    • Contract terms (e.g., destination vs. shipment contracts).
    • Timing of payments vs. deliveries.

    To finish, by understanding and preparing for this defense, you can better protect yourself from preference claims if a customer files for bankruptcy.

    How Can Creditors Defend Against Preference Actions

    You can defend against preference actions in several ways. You should consider the following defenses:

    • Ordinary course of business defense: Show that payments were made according to usual terms and prove consistency with past practices between you and the debtor.

    • New value defense: Demonstrate that you provided additional goods or services after receiving the payment, which offsets the preference amount.

    • Contemporaneous exchange: Establish that the payment was intended as a simultaneous exchange for new value, and prove that both parties meant it to be concurrent.

    • Subsequent new value: Highlight any credit extended or goods provided after the alleged preference to reduce your potential liability.

    • Small transfer defense: For consumer cases, payments under $600 are exempt. In business cases, the threshold is $6,825.

    • Security interest defense: Show that the payment was for a purchase money security interest and prove it was perfected within 30 days of the debtor receiving the goods.

    • Negotiate settlements: Offer to repay a portion of the preference amount and emphasize the strengths of your defenses to encourage a compromise.

    • Challenge preference elements: Dispute whether all required elements are met and question insolvency presumption or greater recovery assertions.

    To finish, document all transactions carefully and maintain consistent payment practices. If faced with a preference claim, consult a bankruptcy attorney to evaluate your specific defenses and negotiate effectively.

    What Strategies Help Creditors Facing Preference Demands

    Are you facing preference demands? Don't panic. We have strategies to help you navigate this tricky situation:

    • Document Everything: Keep meticulous records of all transactions with the debtor. This includes invoices, payment dates, and correspondence.

    • Prove Ordinary Course of Business: Show that payments were made according to established practices between you and the debtor.

    • Demonstrate New Value: If you provided additional goods or services after receiving payments, this can offset preference claims.

    • Establish Contemporaneous Exchange: Prove payments were made in exchange for goods/services at the same time.

    • Challenge Insolvency: If the debtor wasn't insolvent when payments were made, they may not qualify as preferences.

    • Negotiate: Often, settling for a reduced amount is more cost-effective than litigation.

    • Seek Legal Counsel: An experienced bankruptcy attorney can help you build a strong defense and navigate the complex laws.

    To wrap things up, you can protect your interests and minimize potential losses by staying proactive, documenting everything, and seeking legal counsel. With the right approach, you can navigate preference demands more effectively.

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