Here is the fourth defense against preference avoidance actions, the so-called net result defense.

Defenses To Preference Avoidance Actions, Part IV:

The Net Result Defense

Suppose you borrowed $10,000 from ABC Bank.  After paying back ABC Bank the $10,000, you borrowed another $7,000 from ABC Bank.  And suppose you filed for bankruptcy protection less than ninety days after repaying the $10,000 to ABC Bank.  Can the trustee assigned to your case avoid the $10,000 payment as a preference?  The answer to this question is the point of § 547(c)(4):

The trustee may not avoid under this section a transfer — . . . to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —

(A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.

Based on our discussion of § 547(b), we might conclude that the trustee can recover the entire $10,000.  However, § 547(c)(4) limits the recover to the net preference, which is $3,000.  Thus, while you repaid $10,000, the net benefit that ABC Bank derived from the transaction was only $3,000 because it gave you $7,000 after the repayment.

Put another way, when you paid the bank $10,000, your subsequent bankruptcy estate was diminished by $10,000.  When the bank later gave you $7,000, the subsequent bankruptcy estate was replenished by $7,000, leaving a net shortfall of $3,000.  Therefore, the trustee would only be able to recover $3,000 rather than the entire $10,000.
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Here is the third defense against preference avoidance actions, the so-called security interest defense.

Defenses To Preference Avoidance Actions, Part III:

The Security Interest Defense

Suppose you wish to buy a new car that costs $30,000, but you don’t have $30,000.  Your solution is to borrow money for the purchase.  The lender wants some assurance

This is the second post devoted to defenses against preference avoidance actions.  It covers the so-called ordinary course of business defense.

Defenses To Preference Avoidance Actions, Part II:

The Ordinary Course Of Business Defense

Suppose a corporate debtor in Chapter 11 has a lease on the building in which it conducts its business.  Suppose the debtor has lease payments of $25,000 per month.  If it makes its usual on-time payments during the ninety-day prepetition period — i.e., a total of $75,000 — will the DIP (the Debtor-in-Possession, who is the debtor serving as a quasi-trustee) successfully avoid those payments?  Based on 11 U.S.C. § 547(c)(2), the answer is “no”:

The trustee may not avoid under this section a transfer — . . . to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was —

(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms.

Although this Code subsection appears to have two possible conditions ((A) and (B)), each of which focuses on the nature of the payments, there is a third crucial requirement embedded in the introductory language:  the underlying debt itself must have been incurred in the ordinary course of business. 
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I recently had an email exchange with a fellow bankruptcy attorney who was a little confused about something called the § 1111(b) election in a Chapter 11 bankruptcy.  Her confusion was easy to understand because there are some interesting wrinkles in the statutory language that are worth exploring.

Before we get into the somewhat arcane aspects of today’s topic, it might be worth defining a few important terms that we’ll be using, and then summarizing the salient features of Chapter 11 bankruptcy.
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This is a simple question to pose, but the answer is a bit more complicated to give.  Part of the complication lies in the fact that in bankruptcy social security has two identities:  it is income, and it is an asset.  The rest of the complication arises because there is more than one chapter of the Bankruptcy Code under which individuals and married couples file.

I.          Social Security Income As An Asset

In any personal bankruptcy, one of the reporting requirements is found in 11 U.S.C. § 521(a)(1)(B)(i):  “The debtor shall—file—  . . . a schedule of assets . . .”  Social security payments are an asset, and become part of the bankruptcy estate that is created when the debtor files for bankruptcy protection.  (See 11 U.S.C. § 541(a)).
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On January 30, 2013 Shan Li of the L.A. Times reported:

Nearly 44% of American households are one emergency away from financial ruin.  That means they don’t have enough savings to cover basic living expenses for three months if something unforeseen happens such as losing a job or falling sick, according to a recent study by the Corporation for Enterprise Development.  Almost a third of Americans have no savings account at all. . . .  Many people living precariously have jobs.  About 75% are working full time, and more than 15% are earning middle-class incomes of more than $55,000 a year, according to the report.  But despite steady jobs, many of those surveyed are surviving paycheck to paycheck, trying to cope with the recession’s aftermath; one emergency could tip them over “the edge of financial disaster.”  Possible reasons for their lack of savings?  Experts say many factors could be at play, including stagnating wages, rising prices and high credit card debt.

It’s worth noting that a fairly large number of employed people are underemployed, which gives a partial explanation for the precarious position of many people.

How do folks deal with an income shortfall?  Some tap into their credit cards, and increase their debts.  Then they use other credit cards to pay the new credit card debt, and eventually things spiral out of control.

However, a growing number of people are turning to loan sharks for extra cash.  The breathtakingly high interest rates on Payday loans, Cashcall loans, and loans from Don Corleone guarantee a bleak financial future.  In the April 24, 2013 Los Angeles Times, Alejandro Lazo reported:

Payday loans often trap consumers in a cycle of debt, a new report by the federal government finds.  The Consumer Financial Protection Bureau found that the average consumer took out 11 loans during a 12-month period, paying a total of $574 in fees — not including loan principal. A quarter of borrowers paid $781 or more in fees.
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In my last post, I discussed retirement contributions within the Chapter 7 context.  Our attention now turns to retirement contributions in a Chapter 13 bankruptcy.

II.        Retirement Contributions In A Chapter 13 Bankruptcy

In discussing Chapter 7, I referred to Form 22A.  The Chapter 13 analogue is Form 22C, which is very similar to Form 22A; but there are some differences.

One difference is Form 22C’s line 55, which permits a debtor to list “Qualified retirement deductions.”  There is no analogue to Form 22C’s line 55 in Form 22A.  This indicates that the Commission that created Form 22 (Form 22A for Chapter 7, Form 22B for Chapter 11, and Form 22C for Chapter 13) believed that Congress wanted Chapter 13 debtors, but not Chapter 7 debtors, to able to contribute to their retirement —presumably to “encourage” debtors to go into Chapter 13, so that their creditors would receive something through the Chapter 13 plan.

Why did the Commission include line 55 in Form 22C?  The best explanation is found in 11 U.S.C. § 541(b)(7).  A little background will help to understand that statutory subsection and its application to the creation of Form 22C.
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