Bankruptcy Avoidance Action

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The Bankruptcy Code provides that all unsecured creditors are to receive fair and equal treatment. When the debtor goes into bankruptcy, creditors of the business and the bankruptcy trustee all have the option to review past payments made by the bankrupt debtor and may sue to bring those assets back into the bankruptcy estate.

Any payment made by a debtor to a creditor within 90 days of filing bankruptcy may be questioned as a preferential or fraudulent transfer of assets. It may be examined by the trustee and to make additional assets available for distribution, the bankruptcy trustee may bring a preference avoidance action to establish that payments were preferential and demand payments be returned to be redistributed equitably among all creditors.

When facing a demand for the return of funds paid by a debtor who later declares bankruptcy, there are several defenses available, including:

  • Goods or services were delivered and money received at essentially the same time.
  • Goods were delivered (new value advanced) after an alleged preferential payment.
  • The exchange of money for goods was made in the ordinary course of business.
  • The exchange of money for goods was made according to ordinary business terms, the way similar businesses in the industry operate.

Updated by: , J.D.

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