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What Is a Voidable Preference (Unfair Preference)?

unfair preference.jpgTypically, there are warning signs that indicate that a business will soon file for bankruptcy protection. When creditors begin to see these signs of immense financial distress, they tend to dramatically intensify their collection efforts. Of course, this makes sense. After all, creditors want to try to ensure that they are able to get paid back while there is still money available.

When a business does actually file for bankruptcy, all creditor collection activity that immediately preceded the filing must be thoroughly reviewed by a bankruptcy court. Sometimes, pre-filing collection efforts will be allowed to stand, while in other cases, those collection actions may need to be reversed. A 'voidable preference' or 'unfair preference' describes pre-filing collection activity that cannot be allowed to stand.

Why Debt Collection Preference Matters

When a company files for bankruptcy protection, it means that it is stuck in a financially insolvent position. As such, that company is simply unlikely to have enough available assets to pay back all of its creditors in full. Indeed, in many cases, companies that file for Chapter 7 or Chapter 11 bankruptcy protection are far short of being able to repay all creditors. This is why creditor preference matters so much. Preference is the order in which claims will proceed. Creditors need to exercise their rights and legal options available under the United States Bankruptcy Code to ensure that they get repaid as early as possible. If another creditor jumps in front of you in the line, there may not be enough money left for your firm to collect anything at all.

How Do Courts Determine if a Collection Effort Was Unfair?

For a pre-filing debt collection to be 'voided' it will need to have several different characteristics:

  1. It must have occurred within the 90-day period immediately preceding the business bankruptcy filing;
  2. The debtor company must have actually been insolvent at the time that the collection activity occurred; and
  3. The creditor in question must have recovered more money than they would have been able to secure had their claim gone through the standard bankruptcy process.

Any debt collection activity that occurred prior to the 90-day look back period will not be subject to review on the grounds that a creditor 'jumped out of' their preference order. If a debt collection effort is found to be unfair, bankruptcy courts can take remedial action to fix the issue.

Contact Our Business Bankruptcy Team Today

At Diemer, Whitman & Cardosi, LLP, we have extensive experience handling a wide variety of different business bankruptcy claims. To find out what we can do for you and your company, please give us a call today at 408-971-6270. Initial case evaluations are always free of charge. Our passionate San Jose bankruptcy attorneys serve communities throughout Northern California, including San Francisco, Oakland, San Jose, Palo Alto and Mountain View.



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