As American as Apple Pie

One of the best things about this country’s bankruptcy law is that it is inherently optimistic. It embodies a belief that people and businesses deserve a chance to start over without the shackles of debt holding them back, and it encourages financial risk taking by acting as a safety net. Viewed in the abstract, there is something about this that is just so quintessentially American. You might say bankruptcy is as American as apple pie.

What’s funny about saying bankruptcy is as American as apple pie is that neither apple pie nor bankruptcy were invented in the United States. Both were imported, perfected, and popularized here, however.

The roots of bankruptcy law go all the way back to Biblical times. In Chapter 15 of the book of Deuteronomy, it says:

“At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you.”

This sounds similar to today’s Chapter 7 bankruptcies, which forgive most debts. Even the period between debt cancelation years echoes the current requirement that filers wait a certain number of years before filing for bankruptcy again.   

Ancient Rome had laws that allowed creditors to seize the property of debtors who were unable or unwilling to pay, and allowed debtors to volunteer themselves as indentured servants to pay off debts. It is not too much of a stretch to see echoes of this system in our Chapter 13 bankruptcy law, which allows debtors to consolidate their debts and work on paying them off over a period of time.

In other parts of the world, and in different time periods, debtors’ prisons were common. Debtors were arrested and held in these facilities until they could pay off their debts. As you can imagine, this was counterproductive since someone who is in prison cannot earn a living that will allow them to pay off debts.  

What we think of as modern-day bankruptcy law was imported from England, like most of our laws were. Article 1, Section 8, Clause 4 of the U.S. Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” They did so almost immediately, and have continued to tinker with the law from time to time.

As the arch if history suggests, bankruptcy law is not frozen in time. It continues to undergo changes. Our bankruptcy laws have been amended over time to adapt to new circumstances and the changing economy. Today, the world looks to America as an example of what a successful, cutting-edge bankruptcy system should look like. When we change our law, other countries around the world often do so as well.

D-D-D-Defense

If you are a true Packers fan, you know that January 23, 2011 was one of the most exciting days in recent memory for the Packers’ defensive line. The Packers were playing Bears in the NFC Championship Game at Soldier Field. By the time the 4th quarter rolled around we were winning, but it was an ugly game. Then, seemingly out of nowhere, Packers defensive tackle B.J. Raji intercepted a pass and returned it for a touchdown. The 338-pound Raji then broke into a very memorable hula dance, and the Packers went on to win that game, and the Super Bowl.  

Preference defense is not as exciting as the Packers defense, but it can be just as critical to your success as the Packers defensive line is to the team’s success.

A preference defense is necessary when a preference action is filed against your business. Preference actions are the technical legal name for the notice you get when a customer files for bankruptcy. They exist because the court has the power to claw back any funds paid to you by someone who has filed for bankruptcy if the payment was made within 90 days of the bankruptcy. Policymakers gave courts this power because they don’t want people who are planning on filing bankruptcy to pay off their favorite creditors and leave others in a lurch. This is where the term preference action comes from.

Policymakers also wanted to make sure that debtors couldn’t transfer assets to a creditor just to keep them out of the bankruptcy estate. They wanted to make it easy for the courts to claw back assets if they thought anything other than business as usual was going on.

Although preference actions were created to protect against shady behavior, most preference actions are filed against a business that was just going about its business as usual, not suspecting that its customer was in financial distress. No wrongdoing is necessary on the part of the creditor for a preference action to be filed against them.

Fortunately, there are several defensive tactics that creditors can rely on if served with notice of a preferential action. For example, if the payment or transfer of other assets to you was made at the time of the sale or transfer of something of value to the debtor, and that is how you typically did business, and how you intended this transaction to go, you may be able to use a contemporaneous exchange defense. This defense is common, and is why a lot of contracts specify that they are cash-on-delivery (COD).

Most preference actions settle, so it is a good idea to talk with an experienced bankruptcy attorney about what your options are if you are served with one. It is understandably frustrating to pay someone to protect money that is rightfully yours, but it is better to pay a little than to pay it all back to a court. Just like with the Packers, a little defense can help you take your deals to the end zone.