Q: I have just received a notice that a debtor has petitioned for bankruptcy relief, what can I do now to collect the debt owed?

A: At Curtis & Arata we represent creditors, both large and small, secured and unsecured. Regardless of the nature of the debt, creditors are prohibited by the automatic stay of the Bankruptcy Court from taking or continuing any action against the debtor to recover the amount owed. The purpose of the automatic stay is to preserve the status quo pending the bankruptcy proceedings and the determination of which assets the debtor may retain and which are available to pay obligations owed creditors.Over the years, there has been much litigation as to what constitutes a violation of the automatic stay. Certain actions by creditors subsequent to having notice of the bankruptcy may or may not be a violation of the automatic stay. If you have any doubt, assume the stay applies. We recommend that you contact legal counsel prior to taking any action which may be considered a violation of the stay.

Q: I have just been sued by the trustee for receiving an alleged preferential payment. What is a preference and do I have any defenses?

A: The bankruptcy code defines a preference as a situation where a creditor receives any transfer (or payment) of property of the debtor within 90 days before the debtor files for bankruptcy when the payment is for an pre-existing debt, while the debtor was insolvent.

The bankruptcy laws are designed to promote equal treatment of creditors and prevent the debtor from favoring one creditor over another. Certain diligent or fortunate creditors who obtained payment from the debtor immediately prior to the debtor filing bankruptcy may be compelled to return assets received from the debtor to the bankruptcy estate for distribution pro rata to the other creditors, even the more passive creditors. In bankruptcy, this pre-petition payment may be considered a preference. In other words, if a creditor receives more than it would have if the debtor had petitioned for bankruptcy relief before the transfer, then the creditor may have to return the payment to the bankruptcy court. Whether the creditor knew that the debtor was insolvent at the time of the transfer is irrelevant.

However, the bankruptcy code provides certain defenses to this otherwise harsh and seemingly unfair provision. If you are the subject of a preference lawsuit, we recommend that you consult counsel because defenses are available and unless asserted, they may be waived.