If a debtor pays some creditors and not others prior to a New York bankruptcy, it can cause trouble for the creditors receiving such payments. You can read about the five elements the trustee must establish to avoid a debtor’s preference payment to a creditor here. However, even if the trustee can prove the preference occurred, that doesn’t mean creditors are defenseless. In fact, the Bankruptcy Code gives creditors nine defenses against avoiding a preference payment (§ 547(c)). These defenses don’t dispute any of the five elements of the preference payment; instead, they require recipient creditors to prove that they are entitled to the payment for some reason. Here they are:
(1) The payment was a contemporaneous exchange for “new value,” a situation discussed here.
(2) The payment was made in the ordinary course of the debtor’s and transferee’s business.
(3) The creditor gave the debtor “new value” in exchange for the payment. The “new value” can be a secured or unsecured interest. (This is really two defenses combined into one.)
(4) The debtor gave the transferee an interest in a receivable or inventory of the debtor. Some other rules apply. For instance, the transferee’s interest in the inventory or receivable must be “perfected” more than 90 days before the payments and one year if the transferee is an insider.
(5) If the transferee has a perfected statutory lien on the debtor’s assets, and the debtor makes a payment on it, then it’s not avoidable. Examples of statutory liens are mechanics liens and tax liens.
(6) Bona fide payments on debts for domestic support obligations are not avoidable. They’re also usually nondischargeable. It would be highly problematic for a debtor to cease a support obligation and face a contempt order to prevent what would otherwise be a preference. Also note that the payment must be bona fide, i.e. the debtor can’t overpay the transferee.
(7) In consumer bankruptcy cases, any payments that would otherwise be preferences but are less than $600 are not avoidable. Unusually, this figure is not indexed to inflation like other dollar amounts in the Bankruptcy Code (see § 104), so its value will erode over time. The implication is that it will be easier for trustees to avoid preferences in consumer bankruptcy cases.
(8) For bankruptcy cases in which the debtor’s debts are not primarily consumer debts (business debts and secured debts), payments in excess of $6,225 are not avoidable. This amount is indexed to inflation.
For the most part the trustee will try to anticipate these defenses, so if a debtor transferred something to you and the trustee sends a demand letter, then you should definitely consult with an experienced New York bankruptcy lawyer.
For answers to more questions about preference payments, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney New York Bruce Weiner for a free initial consultation.