Collection Efforts When A Debtor Is About To File Bankruptcy

When an individual or a business files bankruptcy, the bankruptcy law attempts to maintain some equality among creditors in dividing up whatever funds are available to pay debts. Following the same philosophy Section 547 of the bankruptcy code can allow a bankruptcy trustee to recover payments made to creditors within 90 days before the bankruptcy was filed.  The idea is that these creditors are receiving preferential transfers, and the funds should be divided among all the creditors.

It can come as quite a shock to a business person, who feels he was only being paid for goods or services provided, when he gets a letter from a bankruptcy trustee wanting a payment returned , because the customer filed bankruptcy within 90 days after the payment. The creditor in this case can argue that the transfer was made in the ordinary course of business , which is a defense against the recovery of a preferential payment in bankruptcy.  What constitutes the ordinary course of business is a question of fact, and the courts look at such points as how long the parties have been dealing with one another and what the sales and payment patterns were before the 90 day period.

What might strike some lenders as unfair is that increased collection efforts during this 90 day period could destroy the ordinary course of business defense.  Frequently, debtors will be having trouble paying, if they are close to bankruptcy, and it seems that the ordinary business practice might be to pick up collection efforts, when someone is not paying.  Nonetheless this can be used against the lender, when a trustee attempts to recover preferential transfers.