What is a preference under the bankruptcy code? What time period is reviewed to determine if a preference has occurred? When does a long-term debt payment to a bank qualify under the ordinary course of business exception?

Answer 1

Preferences are transfers to (or for the benefit of ) creditors on account of antecedent debts that are made form an insolvent debtor's property within ninety days before bankruptcy and that enable the creditors to receive more than they would through a Chapter 7 liquidation. The preference window is enlarged to a year before bankruptcy if the benefited creditor is an insider - someone in a position to control the debtor's conduct such as a relative partner, director, officer, or substantial shareholder. A payment is a preference only if it is for an antecedent, or preexisting, debt. Payments on long-term debt may qualify for the ordinary course of business exception to the trustee's power to avoid preferential transfers if (1) the loan was incurred in the ordinary course of the debtor's business and of the bank's business, (2) the payments were made in the ordinary course of business, and (3) the payments were made according to ordinary business terms.