Understanding Preference Actions in Bankruptcy

This document is a guide that explains preference actions in bankruptcy, detailing the implications for creditors when a company files for bankruptcy. It outlines the legal framework established by Section 547 of the Bankruptcy Code, which allows debtors to recover payments made to creditors within a specified period prior to bankruptcy. The document describes the rationale behind preference actions, emphasizing the principle of equal treatment among creditors. It also discusses common defenses available to creditors against preference actions, including the contemporaneous exchange for new value defense, subsequent new value defense, and ordinary course of business defense. Furthermore, the guide provides practical steps creditors can take to mitigate the risk of being sued for preference actions, such as insisting on payment in advance, maintaining ordinary conduct, and implementing cash on delivery payment terms. The document concludes by highlighting the importance of consulting experienced bankruptcy counsel when faced with preference claims.