One of the worst things that could happen to a collector is to give back money you have extreme difficulty collecting to begin with. Unfortunately, this situation is quite common when on the brink of bankruptcy. Usually, it begins with a letter from a trustee, demanding the return of money previously collected as “preferential transfer”, so to speak, and ends with the collector telling his client the same thing, pursuant to Bankruptcy Code, Section 547 (b).
This particular section of the code prohibits the transfer of the debtor’s interest in property in case the transfers are to a creditor or for the benefit of one on account of a previous debt during the time that the debtor is insolvent and then made within 90 days prior to the filing of the bankruptcy petition.
Moreover, Section 502 (d) of the same code states this provision: “disallow any claim of any entity from which property is…a transferee of a transfer avoidable under…Section 547…of the title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity is liable…”
While the bankruptcy trustee is equipped with the power to claim the property back, there can be several defenses to the claim, such as transfers beyond the 90-day period, contemporaneous exchange and new value, and there’s the usual defense of ordinary course of business, as well.
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