Business Bankruptcies On The Rise Despite Drop In Overall Number Of Bankruptcies

Overall, 2020 was not a good year. We had a global pandemic, which triggered an economic crisis. As a result, you might expect to see a huge jump in the number of bankruptcies filed. But data from the courts tells a different story. Statistics released by the Administrative Office of the U.S. Courts show a 29.7% drop in the number of bankruptcies filed in 2020 compared to 2019. 

It appears that the economic stimulus packages passed by the federal government may have helped many people avoid financial ruin. Or, it could be that the worst is yet to come. The press release accompanying the court data notes that following the 2007 economic crisis, bankruptcies didn’t peak until 2010. 

Trying to predict the future is impossible, but looking at hard data can give us an idea of what is already happening and suggest trends. The data shows that while personal bankruptcies dropped significantly, business bankruptcies actually increased. Chapter 11 reorganizations rose 18.7%, from 7,020 in 2019 to 8,333 in 2020. Of those, 7,786 involved business reorganizations.

The Washington Post did a deep dive on the increase in business bankruptcies to see what types of businesses were hit hardest:

Data on a subset of businesses ― those registered as corporations ― shows that some sectors are faring much worse than others, with restaurants, retailers, entertainment companies, real estate firms and oil and gas ventures filing for protection in far greater numbers than in previous years, according to New Generation Research.

Bankruptcies filed by entertainment companies in 2020 nearly quadrupled, and filings nearly tripled for oil and gas companies, doubled for computer and software companies and were up 50 percent or more for restaurant owners, real estate companies and retailers, compared with 2019, data from the research firm shows. 

Other sectors have so far not fared as badly as one might expect, as only 77 hotel or gaming companies filed for protection in 2020, down from 92 in 2019 ― a year when the tourism industry thrived.

Wisconsin is home to businesses in all of these industries (yes, even oil and gas if you consider frac sand mining to be part of that industry). Looking at Wisconsin-specific data from the U.S. Courts, you can see the number of personal and business bankruptcies filed in each Wisconsin county during 2020. As usual, Milwaukee and the surrounding counties have the most of both types. 

We know the data on what is happening to others is of little comfort when you are struggling to keep your head above water. No matter what is happening to others, we are here for you when you need bankruptcy counsel. The Hanson & Payne team handles both personal and business bankruptcies for people and organizations in the Milwaukee area.

3 Benefits Of Subchapter V Bankruptcies

In February 2020, a new bankruptcy law went into effect. The Small Business Restructuring Act of 2019 (SBRA), which is also being referred to as Subchapter V, created a bankruptcy process designed specifically for small businesses. 

Under the law, debtors can pay off creditors over a three to five-year period through a payment plan based on projected disposable income. At Hanson & Payne, we work with both debtors and creditors. Our role in a Subchapter V case is to lobby the trustee on behalf of our client so the trustee will recommend a plan that benefits our client. To do so, we work with our client to put together what we would consider an ideal plan, then gather all of the evidence that supports that plan. 

The Repayment Plan 

The third thing that sets Subchapter V apart is its repayment plan. This is not something you typically see in other business bankruptcies, but it is common in a Chapter 13 personal bankruptcy. 

The big issue in Subchapter V cases is what counts as disposable income since that is the money that is earmarked for repaying creditors. The pandemic has made this a challenging task since cash flow has been so irregular during the past year. The Hanson & Payne team helps debtors and their creditors determine a fair way to calculate disposable income. 

Milwaukee Bankruptcy Lawyers Small Business Owners Can Rely On

At Hanson & Payne, we are eager to help small business clients who feel the Subchapter V process may be just what they need to survive and thrive post-pandemic. Whether you know Subchapter V is what you want to do, or you are open to other options, our business-savvy team is ready to advise you and guide you along whatever path you choose. If you are looking for legal counsel in this challenging time, we would be honored to take your call. Contact us today to schedule an initial consultation.

Businesses a bankruptcy option that is like a hybrid of a traditional Chapter 11 business bankruptcy and a Chapter 13 personal bankruptcy. This has been a real boon to small businesses here in Wisconsin and across the country during the economic downturn caused by the pandemic. 

There are three big things that set Subchapter V apart:

  • It provides shorter deadlines for completing the bankruptcy process
  • It provides for a private trustee who will work with the small business debtor and its creditors to facilitate the development of a consensual plan of reorganization, and 
  • Creditors are repaid through a court-supervised repayment plan. 

Shorter Deadlines 

Under Subchapter V, businesses have only a 90-day window to submit a reorganization plan to the court. Compare this to the 120-day deadline in Chapter 11 cases, which is often extended for periods up to 18 months. The difference is remarkable, and businesses are getting through the Subchapter V process remarkably fast. 

The law also requires the court to convene a status conference within 60 days of the filing date. 14 days before this conference, the debtor must file a report with the court detailing its progress towards reorganization. These deadlines really speed up the resolution by keeping the court and all of the parties interested in the case hopping. 

The speed cases get resolved is important because bankruptcy filers must pay ongoing administrative fees and expenses. As cases drag on, these amounts can really add up and become a burden on an already cash-strapped business. 

The Role Of The Trustee 

As soon as a Subchapter V case is filed, the United States trustee (UST) will appoint a Subchapter V trustee to the case. The trustee is tasked with facilitating the development of a consensual plan of reorganization. This is a very hands-on job. 

Blise Becomes Milwaukee’s Newest Bankruptcy Judge

Milwaukee attorney Rachel M. Blise has been appointed to fill the vacancy created when former Bankruptcy Judge Brett H. Ludwig, was appointed to the United States District Court for the Eastern District of Wisconsin last September. Blise, who took the oath office on March 17, will serve a 14-year term. 

According to the press release  announcing Blise’s appointment:

Ms. Blise earned her bachelor’s degree from Carthage College in Kenosha, Wisconsin, and her law degree, summa cum laude, from Marquette University Law School, where she served as an articles editor for the Marquette Law Review. After graduating from law school in 2010, she clerked for Fifth Circuit Judge Carolyn Dineen King in Houston, Texas. She returned to Milwaukee in 2011 and joined the business litigation and bankruptcy practice groups at Foley & Lardner LLP. She is currently Senior Counsel at the firm.

 

Ms. Blise serves on the Board of Directors for the Eastern District of Wisconsin Bar Association and co-chairs the Civil Committee. She is also a member of the Board of Directors for the Milwaukee Bar Association and a past chair of the Bankruptcy Section. She is a member of the Seventh Circuit Bar Association and a past associate member of the Thomas E. Fairchild Inn of Courts. Ms. Blise has worked on a pro bono basis for the Wisconsin Women’s Business Initiative Corporation and the Milwaukee Habitat for Humanity. In addition, she has volunteered at the Milwaukee Justice Center

The Hanson & Payne team congratulates Judge Blise on her appointment, and looks forward to appearing in her courtroom. 

We will notify any client whose bankruptcy is impacted by Judge Blise’s appointment. We are optimistic her appointment will cause no difficulties, and in fact may speed the resolution of cases in the Eastern District because it means the court is no longer short of a judge. Fortunately there was not a significant slowdown when Judge Ludwig was promoted because the pandemic was already impacting cases, and September to March is not terribly long to go without a single judge. 

Although the bankruptcy court is a federal court, vacancies on it are typically shorter than other federal court vacancies. Federal district court judges must be appointed by the President and confirmed by the Senate, a process that can take years if there is partisan disagreement. U.S. bankruptcy court vacancies are typically filled within six months because the judges are not appointed by the President. Bankruptcy court judges are instead selected by a majority vote of the circuit court judges in the jurisdiction in which they sit. It says a lot about Judge Blise that she was selected by the judges in our field to serve in her new position. 

If you are a Milwaukee area resident or business who is considering filing for bankruptcy, the Hanson & Payne team is ready to help. Our experienced attorneys handle both personal and commercial bankruptcies. We also do quite a bit of work for creditors and local banks. Please contact our office today to schedule an initial consultation.

Wisconsin Hospital Sues Debtors Despite Pandemic Promises

An explosive report from Wisconsin Watch and WPR revealed that Froedtert South hospital in Kenosha filed more debt collection lawsuits in 2020 than in 2019 despite pledging that it would rarely do so during the pandemic. 

According to the report: 

This year’s lawsuits collectively seek to recoup $1.1 million in alleged debt, according to a WPR/Wisconsin Watch analysis.

 

A previous Wisconsin Watch/WPR investigation found that hospitals statewide sued dozens of patients early in the pandemic. Froedtert Memorial Lutheran in Milwaukee and Green Bay-based Bellin Health Systems dismissed some of those lawsuits following the April 1 report. They were among several hospitals — including Froedtert South — that pledged to limit aggressive debt collection during the public health crisis.

 

“As a general matter, Froedtert South has suspended filing small claim suits during the COVID-19 pandemic,” J. Thomas Duncan III, the hospital’s vice president and chief operating officer, wrote in an April 1 email.

So what happened? Why did the hospital choose to file so many debt collection lawsuits after saying it was not going to do so? The hospital isn’t commenting, but as attorneys with a lot of experience in the debt collection/bankruptcy world, we have a pretty good guess. We suspect the debts were sold off to a debt collection firm in an attempt to raise money for the hospital. 

Many businesses and large institutions do not handle their own debt collection work. Instead, they sell the debt off to firms that specialize in debt collection. Organizations like hospitals do this so they can save money by freeing up staff time that would otherwise be spent on collections, and raise some quick cash. Debt collectors typically pay debt holders upfront and hope to recoup the money in collections, which is where the quick cash part comes in. 

Healthcare providers are in a cash crunch because of the pandemic. Many people have been delaying medical procedures, which reduces the amount of money coming in. Even facilities overwhelmed with COVID patients may be having cash flow issues because their regular patients are not coming in. 

How We Can Help with Medical Debts

At Hanson & Payne, we have been helping both patients and providers here in Wisconsin figure out what to do with their medical debts. 

We help providers determine when and how to get paid during this difficult period of time. We also assist patients who are weighed down by debt. Oftentimes negotiating a debt settlement is a good solution for both parties. 

Providers who are strapped for cash are willing to forgive debts in exchange for a lump-sum payment now, even if that payment amounts to pennies on the dollar. We can facilitate this negotiation and help both sides walk away in a better position than they were. 

The Hanson & Payne team is committed to being there for Milwaukee area families and businesses during this challenging time. Our experience representing both creditors and debtors gives us an edge at the negotiation table, and in the courtroom. If you are looking for legal counsel in this challenging time, we would be honored to take your call. Contact us today to schedule an initial consultation.

Delay in Unemployment Benefits Leads to Bankruptcy

Wisconsin is one of a handful of states that is struggling to disperse Coronavirus relief money allocated by Congress. The delay is so bad it has forced some Wisconsin residents to file for bankruptcy. While bankruptcy may be a good option for some people in financial distress, rushing into bankruptcy could cause you more harm than good. 

Delayed Benefits Cause Distress 

Back in March 2020, when we were just beginning to grasp how serious the pandemic would be, Congress passed a COVID relief bill that increased the value of unemployment benefits and expanded unemployment benefits to workers who are not usually eligible for them — like those who are self-employed or work in the gig economy. It was a much-needed boost for those whose lives have been turned upside down by the pandemic. 

Unfortunately, Wisconsin’s Department of Workforce Development struggled to distribute the new benefits. They blamed their ancient computer system, which is just not equipped to handle the spike in claims and changes in benefit eligibility and levels. Months later, some people were still waiting on their money

When Congress voted to provide additional benefits to the public in December, the same thing happened again. It may be late April before the benefits authorized in December are ultimately distributed. 

Unemployed Look to Bankruptcy System for Relief

There is only so long you can wait for benefits before you have to take whatever action you can to keep yourself afloat. Wisconsin Public Radio reports that people waiting for benefits have “tapped into personal savings, gone into credit card debt and resorted to selling things in an effort to make ends meet.” The Journal Sentinel talked to one woman who chose to file for bankruptcy after her benefits were delayed. 

While bankruptcy may be a lifeline for those in financial distress, timing is really important in bankruptcy law. Talking with an experienced bankruptcy attorney about whether bankruptcy is right for you right now can save you from making a financial mistake out of desperation. 

Timing Is Everything 

There are two timing-related issues to keep in mind when considering filing for bankruptcy. The first is that filing before you hit rock bottom, or before you find yourself on an upswing, means you may go into more debt after filing that you could have otherwise had forgiven if you had waited a bit longer to file. 

The second timing-related issue to keep in mind is that filing for bankruptcy now prevents you from filing again for several years. If you think things are going to get worse over the next couple of years, it might be better to wait to file. 

It is not fun to think about your life getting worse than it is right now when you are already experiencing a lot of financial pain, but it is something you need to consider. 

If you need advice about when to file for bankruptcy, the Hanson & Payne team is here to help. Please contact us today to schedule an initial consultation. 

Will I Lose My Home if I File for Chapter 7 Bankruptcy?

If you’re considering filing for Chapter 7 bankruptcy, you probably have a lot of questions—including whether bankruptcy will put your home at risk. If you file for Chapter 7 bankruptcy, you won’t necessarily lose your home—particularly if you don’t have much home equity and your mortgage is current. However, if you have a significant amount of equity in your home, you may be better off filing for Chapter 13 bankruptcy. In this article, we examine the effect that filing for Chapter 7 bankruptcy can have on your home. 

Important Factors

Whether you’ll lose your home in Chapter 7 bankruptcy depends on 

  • whether your mortgage is current,
  • whether you’ll be able to continue making mortgage payments after filing for bankruptcy,
  • the amount of equity you can protect using a homestead exemption, and
  • the amount of equity you have in your home.

Is Your Mortgage Current?

You may lose your home in Chapter 7 bankruptcy if you’re behind on your mortgage payments when you file. Although the court issues an automatic stay when you file, this usually only serves to delay the foreclosure process for a few months. The reason that filing for Chapter 7 bankruptcy won’t cure a default is that a mortgage is a secured debt. Therefore, Chapter 7 bankruptcy won’t wipe out the mortgage lien that permits the lender to foreclose if you fail to make your payments. In addition, Chapter 7 bankruptcy doesn’t provide a way for you to catch up on past-due payments.

How Much Equity Do You Have in Your Home?

If your mortgage payments are current, you’ll need to determine how much equity you have in your home. The process for doing this is easy. First, value your home. Next, subtract any outstanding mortgage balance from your home’s value. The equity in your home is the amount you’d keep if were you to sell your home.  

If you don’t have any equity, then your home should be safe—bankruptcy trustees don’t sell houses that don’t have equity. If you do have equity, however, you’ll need to be able to protect it with a bankruptcy exemption to avoid losing your home in Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

If you are behind on your mortgage payments and want to keep your home, filing for Chapter 13 bankruptcy may be an option for you to consider. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to catch up on your mortgage payments over the course of a three-to-five-year repayment plan. In addition, if you have more equity in your home than you can protect with a homestead, you can pay your creditors the value of the non-exempt equity in the plan to protect your home. 

Contact a Milwaukee Bankruptcy Lawyer 

If you are considering filing for bankruptcy and want to protect your home, you should contact an experienced Milwaukee bankruptcy lawyer as soon as possible for guidance. At Hanson & Payne, our experienced bankruptcy attorneys will guide you through the bankruptcy process and advise you on the best course of action based on your unique situation. Please contact our office today to schedule a free consultation.

Bankruptcy and Your Children

As a parent, you want what’s best for your children. Therefore, if you’re considering filing for bankruptcy, it’s only natural for you to wonder how this might affect them. In this article, we examine the consequences of filing for bankruptcy as a parent. 

Child Support

It can be difficult to keep up with child support payments when you are experiencing financial difficulties. Unfortunately, however, child support is not a debt that can be discharged in bankruptcy. In fact, when your assets are liquidated in a chapter 7 bankruptcy case, a portion of the proceeds go towards child support payments. In chapter 13 bankruptcy, child support payments are incorporated into your repayment plan.

Of course, bankruptcy also provides relief from other debts, and this can free up money to put toward your child support payments. So, ultimately, bankruptcy can actually be beneficial to any children for whom you provide child support. 

Education Contributions 

Bankruptcy can, unfortunately, affect the amount of money you have available to make monthly contributions to your children’s education fund. In most bankruptcy cases, the bankruptcy court will only allow you to allocate funds on necessary expenses. These include things like rent payments, medical expenses, and food. Although your children’s education is important, the court doesn’t consider it a necessary expense. So, if you file for bankruptcy, you may have to temporarily put education payments on the backburner. However, there are some circumstances under which these payments may be permitted, but you’ll need to consult with an experienced Milwaukee bankruptcy attorney to see if this might apply to your situation.

Children’s Savings Accounts

When you file for chapter 7 or chapter 13 bankruptcy, you must disclose all your assets, debts, and liabilities to the bankruptcy court. However, the court usually doesn’t make distinctions between your property and the property of your minor children. Therefore, in order to save your children’s assets (such as savings accounts) from seizure in a bankruptcy filing, you must structure them in a way that will enable you to prove that they are the sole property of your children. One way to accomplish this is to open your children’s bank accounts under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). However, if you are seriously contemplating bankruptcy or have already filed for bankruptcy, you shouldn’t take any actions related to your children’s savings accounts without first consulting with an experienced Milwaukee bankruptcy attorney. 

Contact a Milwaukee Bankruptcy Lawyer 

If you need a fresh financial start in Milwaukee, you should contact an experienced Milwaukee bankruptcy lawyer as soon as possible. At Hanson & Payne, our experienced bankruptcy attorneys offer bankruptcy and debt negotiation services to individuals throughout southeast Wisconsin. Therefore, if you’re ready to explore your options with an experienced bankruptcy professional, please contact our office today to schedule a free consultation.

Will Bankruptcy Affect My Retirement Accounts?

People often worry that they’ll lose everything in bankruptcy. Nothing could be further from the truth. In fact, bankruptcy allows filers to keep many of their assets, including their retirement accounts. However, a few limitations do exist. In this article, we discuss the effect that bankruptcy can have on retirement accounts and pensions.

You Get to Keep Most Retirement Accounts in Bankruptcy

Bankruptcy exemptions allow filers to keep certain property. Common exemptions include one’s home, car, and household belongings. In addition, nearly all ERISA-qualified retirement accounts and pension plan funds are exempt from bankruptcy. 

Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy, you may lose some of your property. However, your retirement funds should be safe due to federal and state laws.

Chapter 13 Bankruptcy

If you file for Chapter 13 bankruptcy, you’ll keep your retirement accounts, and the amount of the balance won’t affect how much you are required to repay creditors in your Chapter 13 repayment plan. 

Fully Protected Retirement Accounts

Although there are a few exceptions, the exemption amounts for the following types of retirement accounts are unlimited, meaning that the entire retirement account is protected:

  • 403(b)s
  • 401(k)s
  • IRAs 
  • Keoghs
  • Money purchase plans
  • Profit-sharing plans
  • Defined-benefit plans

Traditional and Roth IRAs

For traditional IRAs and Roth IRAs, an exemption limitation exists per person. This amount is updated every year, but it is currently over one million dollars. So, if your traditional or Roth IRA exceeds this limit, the bankruptcy court can use the excess funds to pay back your creditors.

Withdrawn Retirement Benefits 

Although creditors can’t touch the funds in your retirement accounts, retirement benefits that you receive as income aren’t exempt.

Chapter 7 Bankruptcy

If you receive monthly payments from a retirement account or pension, the court will consider it income. Therefore, this amount will be included in your Chapter 7 means test qualification. In Chapter 7 bankruptcy, the bankruptcy court can’t take any retirement benefits that you need for your support, but it may be able to take amounts beyond this.

Chapter 13 Bankruptcy

With Chapter 13 bankruptcy, any retirement income you receive will be used to determine what portion of your unsecured debts you have to repay in your Chapter 13 repayment plan.

The Bottom Line

Although most of your retirement funds should be protected when you file for bankruptcy, you shouldn’t attempt to navigate the bankruptcy process alone. In order to ensure that you keep what you’re entitled to in bankruptcy, it is strongly advised that you obtain the services of an experienced bankruptcy attorney. 

Contact a Milwaukee Bankruptcy Lawyer 

If you would like to explore your bankruptcy options in Milwaukee, you should contact an experienced Milwaukee bankruptcy lawyer as soon as possible. At Hanson & Payne, our experienced bankruptcy attorneys offer bankruptcy and debt negotiation services for individuals in Milwaukee and southeast Wisconsin. So, if you’re ready to explore your options with an experienced bankruptcy professional, please contact us as soon as possible to schedule a consultation. 

Supreme Court To Decide What Happens To Impounded Cars When Owners File For Bankruptcy

The United States Supreme Court is the highest court in the country, so when it takes up a bankruptcy case, everyone pays attention. This year, in City of Chicago v. Fulton, the Supreme Court is tasked with determining what parties in possession of a debtor’s property are to do with that property if the debtor files for bankruptcy. As the case name suggests, it involves the Windy City to our South, meaning the lower court whose opinion is being reviewed, the Court of Appeals for the Seventh Circuit, also handles cases from Wisconsin. This makes this case particularly interesting to us since the Supreme Court will critique the decision-making done by judges the Hanson & Payne team may appear before. 

Who Gets The Keys?

The case is actually a consolidation of four different cases. In all the cases, the city of Chicago impounded a vehicle because the owner failed to pay a fine or fee, typically related to a traffic violation. In such situations, the city is allowed by law to sell off the car if it is not reclaimed by the owner within a certain period of time. In each of these four cases, the various owners filed for bankruptcy after their car was impounded, but before the point where the city could have sold the car. Each owner demanded the city return their vehicle. 

The question before the Court is what the city is supposed to do with the cars after the owner has filed for bankruptcy. And more broadly, what any party that possesses property owned by someone who has filed for bankruptcy is supposed to do with that property. 

SCOTUSblog has the most succinct summary of the laws at issue that we have seen: 

Chicago’s obligations to the debtors turn on how two provisions of the Bankruptcy Code interact. The first is the automatic stay in § 362, which pauses all collection activity against debtors to prevent creditors from racing to consume debtors’ assets before any relief can occur. With a few exceptions, § 362 stays collection activity automatically when the debtor files for bankruptcy protection. Creditors who continue collection activity after the stay is in place risk sanctions.

Here, the debtors argue that § 362(a)(3) required Chicago to return the cars to them as soon as the stay went into effect. This provision bars two kinds of conduct: “any act” either to “obtain possession of property of the estate or of property from the estate” or to “exercise control over property of the estate.” The debtors argue that passively retaining property impounded before bankruptcy is an “act” to “exercise control over property of the estate.” The U.S. Courts of Appeals for the 2nd, 8th, 9th, 11th and now the 7th Circuits have adopted this reading of § 362(a)(3).

The city argues that the analysis of its obligation to return the cars to the debtors cannot stop at § 362(a)(3). Instead, they argue that § 542(a) governs. Section 542(a) provides that “an entity … in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease … shall deliver to the trustee … such property or the value of such property unless such property is of inconsequential value or benefit to the estate.”

The city argues that the “shall deliver” language is not self-executing. Rather, as the U.S. Courts of Appeals for the 10th and District of Columbia Circuits have held, it is an obligation to turn over the property if and when the trustee files an adversary proceeding seeking the property.

Figuring out which section of the Bankruptcy Code is controlling, in this case, means the Court will determine which is more important — protecting bankruptcy filers from debt collection actions, or the rights of creditors. 

What Happens Next?

The Court heard oral arguments in the case in October. Unless something out of the ordinary happens (and it might, oral arguments, in this case, were delayed because of the COVID-19 pandemic) we expect the Court to issue an opinion by the end of June 2021. 

The Hanson & Payne team is keeping a close eye on this case. The Supreme Court’s opinion may impact anyone who is holding property owned by a bankruptcy filer. It may also signal lower courts to put a thumb on the scale in favor of either debtors or creditors when multiple sections of the bankruptcy code are at play. Whatever happens, we will be ready to apply the Court’s ruling in our clients’ cases.

Preference Defense: Bringing Playground Justice Into The Courtroom

There are a set of unwritten yet universal rules that every kid who grows up in the Milwaukee area seems to know. Eeny, meeny, miny, moe is the best way to select a winner. Pinky promises are akin to unbreakable contracts. And saying “no take backs” when you make a trade locks that deal into place, no matter how much the other kid later regrets their decision. These and other rules ensure justice prevails on the playground. 

As we grow up, we see echoes of these edicts in the laws that govern our lives. There is a particularly striking similarity between the playground rule of “no take backs” and preference defense actions in bankruptcy court

What Is the Preference Defense?

Having a preference defense you can assert when one of your customers files for bankruptcy is the “no take backs” of the bankruptcy world. If you do not have a defense, the bankruptcy court can 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.

Although the power to claw back payments through preference actions was given to the courts to protect creditors from debtors who might attempt to transfer assets improperly, no wrongdoing is necessary on the part of the creditor for a preference action to be filed against them. 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.

Fortunately, going about your business as usual may be a valid defense. The ordinary course of business defense applies when a payment subject to clawback was received in the ordinary course of business between the creditor and the debtor. To take advantage of this defense, the creditor must be able to show that its relationship with the debtor did not change in the time period leading up to the debtor’s bankruptcy filing. 

Another popular defense is the contemporaneous exchange for new value defense. It applies when the payment sent to a creditor was intended by both the debtor and creditor to be a payment for some new good or service exchanged right when new assets were transferred to the creditor. This is why a lot of contracts, and especially those with a financially troubled business partner, specify that they are cash-on-delivery (COD).

Unless you want to risk having the money you are rightfully owed clawed back by the courts when one of your customers files for bankruptcy, it is a good idea to talk with an experienced bankruptcy attorney about what options are available to you in case you are served with a preference action. It is understandably frustrating to pay someone to protect the money that is rightfully yours, but it is better to pay a little extra than to pay it all back to a court, and that is what may happen unless you call “no take backs.”