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Creditors can be forced to return payments made by debtors on the brink of bankruptcy

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is a small business bankruptcy ?”


If you are a small business owner and someone owes you a lot of money, collecting the money—or a substantial portion of it—seems like a no-brainer.

Old cash register Charlotte Bankruptcy Lawyer North Carolina Debt AttorneyImagine a debtor coming to you and offering to pay you $100,000. Sure, the debtor owes you $150,000, but the debtor tells you he is about to declare bankruptcy and this is probably your one shot to collect anything.

This is a classic case of creditor beware!

When a debtor makes a payment to a creditor on a pre-existing debt within 90 days of filing bankruptcy, the United States Bankruptcy Code considers this payment a “preference.” While taking the money may seem like the right thing to do—it may satisfy or almost satisfy a debt, and you may need the money—taking money from a soon-to-be-bankrupt debtor may leave you in the position of having to pay the money back to a bankruptcy trustee.

This all hinges, of course, on the debtor actually filing bankruptcy within 90 days of making a payment to a creditor. If a debtor does render a payment to a creditor and then file bankruptcy, the bankruptcy trustee appointed by the bankruptcy court to oversee the debtor’s case can demand, or worse—sue—for return of the money.

Allowing bankruptcy trustees to “claw back” funds paid to creditors within 90 days of a bankruptcy filing “prevents creditors from racing to the courthouse to dismember the debtor during the debtor’s slide into bankruptcy,” according to James S. LaMontagne of New Hampshire-based Sheehan Phinney Bass & Green, and also “facilitates equality of distribution among creditors of the bankrupt debtor.”

If pre-bankruptcy payments to one creditor were allowed, a debtor on the brink of bankruptcy could choose a preferred creditor to whom to pay its remaining assets, leaving little or nothing for other creditors.

Not all pre-bankruptcy payments are considered “preferences.” If a debtor has been making payments in the normal course of business—say one payment of $15,000 per month, under the terms of a promissory note—and makes such a payment within 90 days of bankruptcy, the creditor to whom payment is rendered can defend against a trustee’s claw-back action by arguing that the payment was rendered as a part of the normal course of business between the parties, and did not constitute a pre-bankruptcy preference payment.

In addition, the issuance of “new value” to a debtor who has made an alleged “preference” payment to a creditor may “set off” a creditor’s liability for a preference. For instance, in the example cited above, if upon receipt of the $100,000 from a debtor, you furnish supplies and equipment to the debtor necessary for the continuation of the debtor’s business valued at $50,000, the liability for the preference payment would be reduced to $50,000.

Of course, every bankruptcy is different, and results in a given case will necessarily depend upon the unique facts and circumstances therein. If you have questions regarding bankruptcy, it is important that you connect with an experienced bankruptcy attorney who can assist you with the process.

If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.







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