Preference suits in bankruptcy cases continue to annoy most creditors. However, lawyers for creditors can reduce or even eliminate their clients’ preference exposure by using a relatively unknown preference defense known as the contract-assumption defense.
The contract-assumption defense rests on a simple concept: Pre-petition payments a creditor received under a contract the debtor assumed during the bankruptcy case cannot constitute preferential transfers. A “preference” is essentially any payment a debtor makes to a creditor within 90 days of filing bankruptcy that permits the creditor to receive more than it would have received in a Chapter 7 liquidation. Creditors who receive payments within 90 days before the bankruptcy case is filed often have to pay back this money to the bankruptcy estate absent a defense.
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