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One of the central purposes of the bankruptcy code is to consolidate all of the claims against the bankrupt person or company into a single proceeding. Bankruptcy law has specific rules on how limited assets are divided between multiple creditors. To ensure that these rules are followed instead of the debtor’s preferences, bankruptcy trustees are empowered to demand that creditors return certain payments received from the debtor in the time period leading up to the debtor’s bankruptcy filing.

From the perspective of a creditor, a demand for the return of a payment can seem unfair. Even if the debt was genuine, the creditor may be forced to return the payment for the benefit of other creditors. However, this system is meant to guarantee that every creditor receives as much of what they are due as possible, by ensuring that no single creditor is able to deplete the bankruptcy estate to the disadvantage of the other creditors involved.

Fortunately, there are defenses available that can allow creditors to keep payments received before the bankruptcy filing. A bankruptcy attorney can evaluate the circumstances and determine whether you’re entitled to keep the payment.

What Is a Preference Payment?

When a debtor files for bankruptcy, all of the debtor’s property (with certain exemptions) is combined into a bankruptcy estate for the purpose of redistributing the assets among the debtor’s creditors. This bankruptcy estate is then divided by a court-appointed trustee among the creditors based on the rules of the bankruptcy code.

A payment is considered a “preference payment” when it is made to a creditor by a debtor who files bankruptcy shortly after making the payment. Essentially, the debtor “preferred” to pay this creditor over their other creditors, who will be forced to take a piece of whatever remains in the bankruptcy estate. Section 547 of the bankruptcy code allows the trustee to demand that creditors who received a payment within a certain time period before the debtor filed for bankruptcy return that payment to the bankruptcy estate.

A payment is only a preference payment if the debtor was insolvent (had more debts than assets) at the time of payment and the payment was for an existing debt, not a new transaction. Additionally, the trustee can only demand return of the payment if keeping it would leave the creditor with more than he or she would receive if the debtor’s assets were liquidated and divided among the creditors in a chapter 7 proceeding.

Exactly what qualifies as a preference payment varies depending on the status of the debtor and the creditor. If the debtor is an individual, only payments of $600 or more can be considered preference payments. If the debtor is a company, only payments of $6,825 or more can be considered preference payments. 

The bankruptcy code also distinguishes between insider creditors, who have a personal relationship with the debtor, and outsider creditors, who don’t. Payments to insider creditors can be considered preference payments if made within the year before the bankruptcy filing, while payments to outsider creditors can only be considered preference payments if made within 90 days before the filing.

Defenses to Preference Payment Demands

Not every payment received by a creditor within the 90-day or one year window before a bankruptcy filing needs to be returned. The bankruptcy code allows creditors who receive a “preference payment notice” certain defenses that allow them to keep the payment. Any creditor who receives a preference payment notice from a bankruptcy trustee should consult a lawyer to determine whether there are any defenses to returning the payment to the bankruptcy estate.

Preference payments only include payments for past debts. If the payment was in exchange for a specific service provided around the time of the payment, it is not a preference payment. For example, if a debtor hires a contractor to fix his roof and pays the contractor $1,000 for the work, the $1,000 is not a preference payment.

Payments in the ordinary course of business between a debtor and creditor are also not considered preference payments. For example, if the debtor is a business that buys a certain product from the creditor every month, it would not be a preference payment. Child support and alimony payments are also not considered preference payments.

Whether a payment can be considered preferential and must be returned to the bankruptcy estate will depend on several factors including the nature and timing of the debt, the relationship between the parties and whether there are any available exceptions that apply. An experienced attorney will be able to analyze the facts surrounding your situation and determine the best options available to retain as much of the money owed to you as possible.  

What Should I Do if a Bankruptcy Trustee Demands I Return a Preference Payment?

If a bankruptcy trustee has demanded that you return a payment to the estate, contact Rosenblum Law for a free consultation today. Our experienced bankruptcy attorneys can analyze the facts of your situation and determine the best available strategy to let you keep the money you are owed. Call 888-815-3649 or email us.