Bankruptcy Discharge as Preference Defense

29 Jul Bankruptcy Discharge as Preference Defense

A preference is when a bankruptcy trustee or debtor in possession tries to recover pre-bankruptcy debt payments to certain creditors. There are various defenses available to such creditors in Section 547 of the Bankruptcy Code. However, what about the scenario when a small business files bankruptcy and the trustee seeks to recover pre-bankruptcy debt payments to officers? An experienced attorney will always examine a small business bankruptcy filing for such transfers and assess exposure. However, what if the owner, because of personal guarantees or other debt problems, decides to file bankruptcy as well? Can the owner’s own bankruptcy discharge prevent a trustee from recovering preference money from him?

In short, the answer is, yes. Although it is not listed among the available preference defenses in Section 547, a bankruptcy discharge will trump the trustee’s right to recover a preference as long as the trustee’s right, which would arise on the business’ bankruptcy petition date, preceded the individual’s bankruptcy petition date. Once awarded, the business owner’s discharge would be a permanent injunction against the collection of any preferential debt repayment. There is a caveat: if the the trustee can successfully content that the debt repayment was fraudulent or in breach of a fiduciary duty, he would have separate groups to seek a nondischargeability ruling with respect to the preference, but after canvassing the attorneys who write for the Bankruptcy Law Network, it seems that none have encountered a problem with this.

So, what’s the bottom line? A business owner planning to file personal bankruptcy and dissolve his company can probably repay any valid debts he is owed without significant danger, even if the business itself files bankruptcy (as long as the business files first).

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Nicholas Ortiz, Boston Bankruptcy Attorney

From Attorney Ortiz: We have been helping consumers and small businesses in Massachusetts successfully navigate through the bankruptcy process since 2002. We offer free initial consultations and payment plans. Call us at 617-716-0282 to discuss your debt relief options. Mention the Bankruptcy Law Network when you call!
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