Understanding Special Claims in Bankruptcy: What Creditors Need to Know‍

When a company files for bankruptcy, it's crucial that all similarly situated creditors receive equitable treatment. This fairness is especially significant among general unsecured creditors, who range from trade vendors to landlords and contractual partners. It's not uncommon for some creditors to receive payments just before the bankruptcy filing, creating disparities in how creditors are treated under the bankruptcy code.

Disclaimer: The information in this article is for informational purposes only and is not legal advice. Xclaim is not a law firm. For legal advice tailored to your situation, please consult a qualified attorney.

What Constitutes a Preference Payment?

From our discussions on what constitutes a bankruptcy claim (the right to payment from a debtor), we know the petition date marks the point when claims arise. Typically, it's presumed the debtor was insolvent for the 90 days preceding the petition date.

Under Section 507 of the U.S. Bankruptcy Code, a preference payment is any payment made to a creditor (whether in cash, property, or an interest in property) within 90 days before the petition date. For insiders, this period extends to one year.

The goal here is to prevent favoritism, such as a debtor settling debts with primary suppliers while neglecting others. If unsecured claims go unpaid in the reorganization, the preferred supplier could receive full payment, leaving others with nothing.

The 90-Day Rule Explained

The 90-day rule serves to prevent last-minute, preferential payments to certain creditors. As per Section 547 of the Bankruptcy Code, this timeframe ensures that no creditor unfairly benefits in the lead-up to a bankruptcy filing. For insiders, this period extends to a year.

Defenses Against Preference Claims

Not all payments within the 90-day period are subject to clawback. Creditors can assert several defenses:

• Ordinary Course of Business: Payments made in the regular course of dealings, without deviation from past practices.
• New Value: Creditors who provided new goods or services after the preferential payment.
• Contemporaneous Exchange: Transactions where the debtor received equivalent value immediately, akin to cash-on-delivery.
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Handling large preference claims can be costly, often necessitating legal support if the debtor seeks recovery through formal proceedings.

Advice for Trade Creditors

If you receive a bankruptcy claim, it's advisable to document all payments from the debtor during the 90 days before the petition date. For insiders, document all transactions from the previous year. Well-documented payments help mitigate the risk of having to repay them and support a favorable resolution if you decide to sell your claim.

How Xclaim Can Assist

With billions at stake in annual reorganizations, navigating bankruptcy claims can be daunting. Selling your claim through a marketplace like Xclaim not only provides immediate cash but also exposes your claim to a broader pool of buyers, ensuring competitive offers. Register at www.x-claim.com to manage or sell your claim efficiently.

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