By Ryan C. Wood

A preference is basically a payment made by a debtor to a creditor prior to the debtor filing for bankruptcy protection.  Yes, even though you are owed the money the debtor or trustee in the bankruptcy case can request and sue you for the return of the payment you received from the debtor during the 90 days prior to the case being filed.  The theory is that you were preferred over another creditor given that you were paid and they were not.  To make things fair you should have to return the payment and all creditors then share the money instead of you receiving it entirely.

A preference is defined by Section 547 of the Bankruptcy Code.  Any transfer by the debtor to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor before such transfer was made, transfer was made while the debtor was insolvent, on or within 90 days before the date of the filing of the bankruptcy petition or between 90 days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider, that enables the creditor to receive more than the creditor would receive if the case were a case under Chapter 7, the transfer had not been made, and the creditor receiving the payment of such debt to the extent provided by the provisions of this title.

Ordinary Course of Business Defense

The ordinary course of business defense, pursuant to Section 547(c)(2) of the Bankruptcy Code, is the most common defense.  If the payment was made under terms that were ordinary between the debtor and creditor prior to the bankruptcy case being filed you may have a defense.  This defense can be complicated depending upon how long the relationship was prior to bankruptcy and the payment history of the parties.  How payment is made in the industry is also a factor to be looked at by the Court.  The creditor as the defendant has the burden of proving the payment was made in the ordinary course of business.

Contemporaneous Exchange For New Value

This defense, pursuant to Section 547(c)(1), provides if the payment was intended by both the creditor and the debtor to be a contemporaneous exchange for new value the payment is not a preference.  Basically you provided a good or service to the debtor on a cash on delivery basis.  Given that, the payment made cannot be on a antecedent debt, it was a payment for the exchange of a good or service for immediate payment.

Subsequent New Value Defense

Section 547(c)(4) of the Bankruptcy Code provides a defense to a preference claim if you continued to provide a good or service to the debtor after the date of the payments in question.  If you were paid $20,000 on December 10, 2011, and then provided the debtor $20,000 in new goods or services, the $20,000 payment you previously received would be protected to the extent of the new value you gave the debtor since the payment.  In this example you gave the debtor an additional $20,000 in new value.  You should be able to use the subsequent new value defense to keep the $20,000 payment.

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