Bankruptcy from a Creditor’s Perspective
By Carl Rafoth Much has been publicized concerning the number of business bankruptcies filed in recent years. A creditor who was paid prior the bankrupt debtor’s filing for bankruptcy may be targeted as having been the recipient of a “preference,” as that term is defined by the Bankruptcy Code. The simple definition of a “preference” is the receipt by a creditor of a payment, on an old or somewhat stale account for goods or services provided to the bankrupt entity, which payment was received within ninety (90) days prior to the date of the debtor’s filing a petition for relief under either Chapter 7 (liquidation) or Chapter 11 (reorganization) of the United States Bankruptcy Code. Once a bankruptcy is filed, it is incumbent upon the bankrupt debtor, either directly or through a court-appointed trustee, to request reimbursement of this preference payment. Typically, the trustee will review the books and records of the debtor and then send letters of demand for reimbursement to virtually all creditors to whom payment has been made within this 90-day preference window. The creditor should not panic and should not return the money, as many defenses exist, especially under the Bankruptcy Act which became effective in October, 2005. The 90-day reach-back period is extended to one year under certain circumstances when insiders, such as officers, directors or owners of a debtor company, have received “preferential payment.” The preference rules also can apply to individual bankruptcies. A common example may include a grandchild repaying money borrowed from a grandparent within one year of the grandchild’s bankruptcy filing. That repayment may be subject to challenge as a preference. For more information on this or other bankruptcy issues contact Atty. Carl Rafoth at crafoth@fandrlaw.com
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