Preferential Payments to Creditors and Ordinary Business Defense

A creditor, who receives a significant payment right before a debtor files bankruptcy might believe he is entitle to keep the money. After all he no doubt provided legitimate goods or services that the funds are paying for. When such a payment is over $600.00 however and is received within three months of the bankruptcy filing (or within a year if the creditor is considered related to the debtor) this can be considered a preferential payment, and while it usually comes as a surprise to the creditor, he may be contacted by a bankruptcy trustee, who wants him to give the money back, so the funds can be divided more fairly among all the creditors.

If this lender contacts a bankruptcy lawyer, he might be advised to raise the defense that the funds were received in the ordinary course of business. This means that the bankrupt debtor was following an established pattern in making the payment. Thus if a business man customarily pays a supplier six months after delivery and all at once decides to pay a year's debt right before he files bankruptcy, his creditor could have a problem. Even if the payment follows the normal rate, the creditor could still find himself with a preferential payment, if he took unusual steps to collect the debt during the three month period, such as bringing a lawsuit.

Can Same Sex Couples File A Joint Bankruptcy

On October 18, 2012 the United States Second Circuit Court of Appeals found the Defense of Marriage Act unconstitutional. The Defense of Marriage Act restricts the legal benefits of marriage under Federal Law to couples of the opposite sex. In the case Edith Schlain Windsor v United States however, a taxpayer raised the issue of whether a same sex marriage could be recognized for estate tax purposes. The IRS refused to accept this position, but the court ruled in favor of the taxpayer. The judges did not feel that the Defense of Marriage Act was closely related enough to an important government interest to pass the test of constitutionality.

This issue will likely go to the Supreme Court next, so we can hardly consider this a final answer, but with the tendency of appeal courts to uphold the decisions of lower courts, the ruling has a good chance of surviving.

Since the case involved estate taxes the results might seem to be of greatest interest to estate
planning attorneys, who work with same sex couples. However, if the Defense of Marriage Act is thrown out it will affect other areas of the law as well, such as bankruptcy.

Currently same sex couples are not allowed to file a joint bankruptcy. However, if the Supreme Court rules in their favor we would expect joint bankruptcies to become available to same sex couples as well.

Republican Proposal On Fiscal Cliff

Yesterday the Republicans put forth a proposal for avoiding the fiscal cliff, and as a bankruptcy lawyer I  do not feel comfortable about the state of our economy, if they stick to their guns. They have proposed $800,000,000,000 in tax increases over the next ten years; however, they have claimed that they can find this amount by limiting deductions rather than raising the rates.


While arguably this loophole plugging approach could theoretically work, it requires that someone identify which deductions will be closed, and the Grand Old Party has not bothered to take this step. They just contend that with all the loopholes out there, they can work the details out later, and they want to pretend they do not have to deal with the fact that all loopholes are popular among their own constituencies. They seem to be oblivious to the fact that, if they take away the mortgage interest deduction homeowners will be up in arms, or if they reduce charitable deductions the charities across the country will be lobbying to keep their benefits.

The bottom line is that until the specifics are identified, and the opposition comes to the surface, there is no way to tell, if the so called proposal has a serious chance of passing.

What the Republican proposal has done is create more uncertainty about what the tax law will be next year, which Congress should have learned by now makes it nearly impossible for the job creators in America to make informed investment decisions,