Preference Defense


In certain bankruptcy cases, the bankruptcy trustee sends preference demand letters to unsecured creditors seeking repayment of money received from the debtor before bankruptcy. Perrotta & Cahn defends creditors against preference actions, using defenses provided by bankruptcy law to help creditors keep payments they have already received for completed transactions. Our firm provides bankruptcy and debt relief services to clients throughout northwest Georgia from offices in Cartersville, Calhoun, Dalton and Dallas.

What are Preference Demands?

Under the U.S. Bankruptcy Code, debtors filing for bankruptcy are presumed to have been insolvent for at least 90 days before declaring bankruptcy. Therefore, all payments and transfers made to creditors by the debtor during this period are suspected of being preferential (i.e. the debtor was choosing to pay some creditors over others). The return of payments made during the “preference period” is intended to redistribute a debtor’s assets equally among all unsecured creditors.

Often a creditor’s first notice of a preference action is the receipt of a preference demand letter from a bankruptcy trustee. The demand generally includes the debtor’s name, account number, the total dollar amount of payments made during the preference period, check numbers and amounts, and invoices being paid. The demand letter will also state the period of time in which the preference is to be repaid before any litigation action is commenced.

At this point, the creditor must decide whether to pay the amount of the demand, attempt to negotiate a settlement for a lesser amount, or defend against the preference claim. Fortunately, creditors do have a number of preference defenses that can be raised under bankruptcy law.

Preference Defenses Provided by Bankruptcy Law

In many cases, it is in a creditor’s best interest to defend against a preference action. Section 547 of the Bankruptcy Code provides the following defenses to a preference claim:

  1. The payment was made in a contemporaneous exchange of new value to the debtor.
  2. The payment was made in the ordinary course of business.
  3. The payment was a security interest in property securing new value to the debtor.
  4. The payment was made before the creditor provided new value.
  5. The payment was a security interest in inventory or a receivable, such as a floating lien, that did not impair other creditors.
  6. The payment was the fixing of a statutory lien.
  7. The payment was an alimony or child support payment.
  8. The payment was a transfer of property with a value less than $600.

With all of these defenses, you should almost never simply give back money you have received without first weighing your options. Often preference actions settle, and you will not have to repay the entire amount of the preference claim. Sometimes, you may not be liable for any of the amount claimed.

Contact an Experienced Preference Defense Attorney in Northwest Georgia

If you have received a preference action from a bankruptcy trustee, please contact Perrotta & Cahn for a free initial consultation. We can help you evaluate your defense options and keep payments received from bankrupt debtors.