what is ordinary course of business is bankruptcy preference period

by Derek Zboncak 5 min read

The bankruptcy trustee doesn’t have an unlimited timeframe to work from. 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 Basic Preference Laws in Bankruptcy:
Within the 90-day period prior to filing bankruptcy (the “Preference Period”), some creditors receive payment but many do not. By forcing the return of transfers made during the Preference Period, the debtor-trustee ensures that the assets of the bankruptcy estate are increased.

Full Answer

What is the preference period in bankruptcy?

Within the 90-day period prior to filing bankruptcy (the “Preference Period”), some creditors receive payment but many do not. By forcing the return of transfers made during the Preference Period, the debtor-trustee ensures that the assets of the bankruptcy estate are increased.

What is the ordinary course defense in bankruptcy?

Jan 23, 2022 · The “ordinary course of business” prong (subsection A) is known as the subjective test because it concerns the history of dealing between specific the debtor and creditor. The “ordinary business terms” prong (subsection B) is known as the objective test because it concerns what is normal in the industry in which the debtor and creditor do business.

Can a creditor have a preference in bankruptcy?

Apr 22, 2020 · The bankruptcy trustee doesn’t have an unlimited timeframe to work from. 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 preference period for antecedent debt paid to non …

What is a pre-preference period?

While researching the ordinary course of business defense to preference actions and speaking with attorneys in the field, a bankruptcy attorney from a prominent law firm stated that when he sees an ordinary course of business defense in a bankruptcy preference action, his first instinct is to settle the case because courts have not

What is ordinary course in bankruptcy?

The “ordinary course of business” defense is intended to protect ordinary trade transactions between a debtor and a creditor. Key to proving the defense is a showing that the transfers during the preference period are consistent with how transfers were made prior to the preference period.Sep 30, 2015

What is preferential treatment bankruptcy?

Preferential treatment is payment on a debt or transfer of property made for the benefit of certain creditors over others shortly before filing for bankruptcy. Some people filing for bankruptcy have certain debts they would prefer to pay back, or would prefer to pay back before others.Mar 27, 2017

What is an avoidable preference in bankruptcy?

An avoidable preference is a payment made before filing for bankruptcy that prefers one creditor over others similarly situated. The point is to make sure that all creditors have an equal chance to get paid instead of one creditor getting all of a bankrupt debtor's assets.

What are the rights of creditors with priority in a Chapter 7 liquidation?

All creditors have the right to be heard with regard to liquidation of the debtor's nonexempt assets in Chapter 7 and with regard to the debtor's repayment plan under Chapter 13. All creditors are also entitled to challenge the debtor's right to a discharge. Not all creditors are treated equally in a bankruptcy case.Oct 18, 2021

What is meant by preferential creditors?

A preferred creditor, also known as a "preferential creditor", is an individual or organization that has priority in being paid the money it is owed if the debtor declares bankruptcy.

Who are preferential creditors give an example?

More Definitions of Preferential Creditors

Preferential Creditors means those creditors of ASUSA with Preferential Liabilities. Preferential Creditors means SFHG Creditors who hold SFHG Claims which are preferential within the meaning of section 386 of the Insolvency Act.

Does the trustee monitor your bank account?

While your trustee will most likely periodically check all of your financial accounts such as your bank accounts, in order to ensure that you have enough money to continue making your bankruptcy payments, they are not permitted to touch any of your funds, other than the funds which are allocated for your secured loan ...4 days ago

What is the bankruptcy lookback period?

The courts require a look bankruptcy back period of six months, to ensure that there has not been a major liquidation of assets or deliberate reduction in income in anticipation of filing the bankruptcy petition. Your six month income lookback for bankruptcy includes: Wages earned. Commissions and bonuses earned.

What is an avoidable preference?

In layman's terms, an avoidable preference is a transfer or payment made to a creditor by a debtor that the bankruptcy trustee later seeks to recoup for the benefit of the bankruptcy estate and repayment of the estate's creditors.

What is a priority claim Chapter 7?

In Chapter 7 bankruptcy, priority debt is significant enough to jump to the head of the bankruptcy repayment line. Priority debt includes domestic support obligations and employee wages, and the Chapter 7 bankruptcy trustee must pay them before other commitments, such as credit card balances and medical bills.Mar 31, 2022

How long can Chapter 7 trustee keep case open?

about four to six months
How long can Chapter 7 trustee keep case open? A. The Chapter 7 trustee can keep the case open for about four to six months after filing the bankruptcy papers. However, this does not end with discharge, but with the court's final decree.Sep 24, 2018

What are considered priority debts?

'Priority debts' are debts that can cause you particularly serious problems if you don't do anything about them. You need to work out which of your debts are priority debts and deal with them first.
...
Phone or internet bills
  • have a disability or long-term health condition.
  • need them for your job.
  • are looking for work.

Why is bankruptcy code important?

The Code wants to give a fair shake to all creditors. People filing bankruptcy can’t pay back all their debt to families , leaving other creditors out to dry. The Bankruptcy Code also wants to discourage people from making a transfer of property between family members to hide money or real estate from the court.

How long do you have to pay creditors before filing bankruptcy?

For regular creditors, the preferences occur in the 90-day period before filing bankruptcy. When you fill out the bankruptcy paperwork, you will list your payment history. The papers ask for all the debts above $600 you paid during the preferences period.

What are preference payments?

Conclusion. 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.

What is the first step in a loan?

First, the creditor – the person who made the loan – received money from the borrower. This money could be paid voluntarily, or it could be taken through a wage garnishment or a bank levy. Second, the money must be meant to repay part of a debt that existed before the date of the payment.

What happens if you don't pay your debt?

If you don’t make these payments, you can lose your car or home. Unsecured debt includes medical bills, student loans, spousal and child support. Debts are also divided into dischargeable and non-dischargeable debts. Dischargeable debts include medical bills, credit cards, and personal or payday loans.

What are dischargeable debts?

Debts are also divided into dischargeable and non-dischargeable debts. Dischargeable debts include medical bills, credit cards, and personal or payday loans. Non-dischargeable debts include taxes, spousal and child support and federal student loans. These payments won’t go away after finishing your Chapter 7 case.

How much money does Joe owe on his credit card?

Joe owes a lot of money on his unsecured credit card. On December 31, he received an end-year-bonus of $2,000 from his job and put all this money towards the credit card bill. Two weeks later, in the middle of January, Joe filed his Chapter 7 petition. The trustee can recover payment from the creditor because Joe paid the credit card company more than $600 in the 90 days before filing. As long as the debt is dischargeable under bankruptcy law, Joe won’t really be impacted by the trustee’s work to recover the preference claim.

What is the purpose of a trustee in bankruptcy?

The trustee in bankruptcy is incentivized to claw-back any transfers made by the debtor before the bankruptcy petition is filed in order to maximize the trustee’s own compensation. In addition to the trustee’s ability to attack fraudulent conveyances and actions taken by creditors in violation of the automatic stay, ...

What is the final question of fact to be weighed by the court?

The final question of fact to be weighed by the court is the contemporaneousness between the exchange and the new value provided. The Bankruptcy Appellate Panel of the Ninth Circuit weighed in on the contemporaneous element, quoting a bevy of cases from other circuits and holding:

Who is Nick Moss?

Nick Moss is an attorney at Talkov Law in Los Angeles. The focus of his practice is real estate law, business litigation and bankruptcy in California. He can be reached at (310) 496-3300 or nick (at)talkovlaw.com.

Does bankruptcy reduce preference liability?

New value that remains unpaid on the bankruptcy filing date always reduces preference liability. However, courts have reached conflicting holdings on whether new value that was ultimately paid during the preference period should reduce preference liability.

Can a creditor rely on a preference payment?

There have not been many published decisions addressing the industry a creditor can rely on in attempting to prove the alleged preference payments were made according to ordinary business terms. Nonetheless, this issue has been consistently raised by both plaintiffs and defendants over the last few years and has introduced another layer of complexity into determining the applicability of the objective OCB defense.

What is the OCB defense?

The OCB defense requires proof, by a preponderance of the evidence that (1) the alleged preferential transfer paid a debt that was incurred in the ordinary course of the debtor’s and creditor’s business or financial affairs— which merely requires proof of a trade creditor’s extension of credit terms to the debtor—and (2) that the transfer was either (a) made in the ordinary course of the debtor’s and creditor’s business or financial affairs (the “subjective” part of the OCB defense), or (b) made according to ordinary business terms (the “objective” part of the OCB defense).

What is the applicability of the subjective prong of the OCB defense?

Most court decisions dealing with the applicability of the subjective prong of the OCB defense have relied on the consistency in the timing of the alleged preference payments compared with the timing of payments during the parties’ prior course of dealing before the preference period. The courts have compared the timing of the payments made during and prior to the preference period based on a variety of methodologies that have sometimes led to conflicting decisions.

What is a paid new value defense?

The paid new value defense has been further complicated where the new value was paid for or the creditor otherwise recovered the new value after the bankruptcy filing. This occurs where (1) a creditor received payment of the new value post-petition pursuant to court order, such as a critical vendor order, or (2) the creditor reclaimed the goods that were part of its new value defense, or (3) the debtor returned the new value to the creditor. The few courts that have addressed this issue have reached conflicting holdings over whether a creditor’s new value defense would be reduced by the debtor’s post-petition repayment or return of new value pursuant to a court order.

What is Cen-Tex Plaster?

Satija v. C-T Plaster, Inc., aka Cen-Tex Plaster, Inc., et al. (In re Sterry Industries, Inc.), the United States Bankruptcy Court for the Western District of Texas court analyzed the subjective OCB defense by a defendant whose ownership, and course of dealing, had changed prior to the preference period. Sterry and the defendant had a business relationship for some time prior to Sterry’s bankruptcy filing. Up until six months before Sterry’s bankruptcy, each invoice was on “Net 30” terms. Sterry would generally mail a check to the defendant but sometimes a representative of the defendant picked up the check.

What is a preference claim in bankruptcy?

A preference claim is brought by the bankruptcy trustee against creditors paid within a certain period prior to the debtor filing for bankruptcy. These claims are sometimes colloquially referred to as “claw-back” claims.

When a creditor provides additional goods or services after a preference payment is made, the value of new goods may

Where a creditor provides additional goods or services after a preference payment is made, the value of new goods may be used to offset the preference payment. The creditor must prove: (1) the new value was given to the debtor after the preferential payment was received; and (2) the creditor did not receive any other payment for that new value.

What happens if a company files for bankruptcy?

If they file for bankruptcy, you could be required to return money they legitimately paid to you months earlier, even if you were not aware of their difficulties at the time. This is because bankruptcy law may treat you as having received an ...

What is Section 547?

Section 547 of the Bankruptcy Code sets forth rules regarding the payment and discharge of debts of a debtor. An important public policy underlying bankruptcy law is the equal treatment of similarly situated creditors in bankruptcy. One creditor should not be given a “preference” over others in the same class of creditors.

What is an insolvent debtor?

Made while the debtor was insolvent. An insolvent debtor is one who has more liabilities than assets. Notably, under the Bankruptcy Code, a debtor is presumed to have been insolvent during the 90 days prior to the filing of the bankruptcy.

Can de minimis be returned?

In addition, de minimis transfers that are deemed too small also need not be returned.

What are the exceptions to bankruptcy?

The most commonly invoked exceptions are generally known as the "ordinary course of business" and "new value" exceptions. Ordinary Course of Business.

What is transfer in bankruptcy?

The Bankruptcy Code broadly defines " transfer" to cover every possible transfer of a property interest, including the granting of a security interest or lien, and even includes involuntary transfers, such as the attachment of a judicial lien.

What is a cod payment?

COD payments are classic examples of these types of protected payments. Consistent with the purpose of the exception, the trustee may only be prevented from clawing back a transfer to the extent of the new value provided. If a debtor pays more than something is worth, the trustee may seek to recover the excess.

How long does it take for a trustee to prove that a debtor is insolvent?

However, the presumption that the debtor is insolvent applies only to the 90-day window. Thus, if the trustee sues an insider for return of a transfer made more than 90 days before the filing of the petition, the trustee must prove that the debtor was insolvent at the time of the transfer.

What is the objective test?

If the course of performance between the parties cannot be proven, perhaps because of poor record keeping, a creditor also can try to prove that a transfer was "made according to ordinary business terms.". This is referred to as the objective test.