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It depends upon the circumstances of the payment schedule. For instance, suppose a creditor is owed $100,000 and is holding off credit to the debtor before filing a case and wants $10,000 each month before extending $8,000 in credit. Well, in effect, that agreement is to coerce payment of the old antecedent debt. Simply because it’s an agreed-upon payment schedule, it may be considered preferential. It depends upon what the parties had structured and analysis of the agreement.

One new aspect of preference defense based upon restructuring agreements of the parties has been included in the Consolidated Appropriations Act. It amended the bankruptcy code to prohibit a debtor trustee from avoiding payments made by the debtor during the preference period for “covered rental arrearages” and “covered supplier arrearages.” To utilize the defense under the CAA, a debtor and the party who received the payments must have entered into a lease or contract before filing the bankruptcy and amended the lease or agreement after March 13, 2020. The amendment must have been to defer or postpone payments made that would otherwise be due under the lease or contract. This particular preference exemption does not apply to payments of interest, penalties, or fees incurred the March 13, 2020 amendment.

Under the Consolidated Appropriations Act, this provision will sunset in two years on December 27, 2022. In my view, this was a prudent protection put into CAA because landlords who went to work with debtors are incentivized to with their customers and enter into revised agreements that would restructure old debt. After December 27, 2022, this change will expire.

What Is A Debtor Audit?

Among the debtors, attorneys’ responsibilities to their clients and potential clients are to advise them that individuals who file for relief under chapters 7, 11, or 13 of the Bankruptcy Code are subject to an audit. The audit is a measure as part of the bankruptcy 2005 statute changes, which essentially says that the goal is that at least one out of every 1,000 individual chapters 7 and chapter 13 cases will be randomly selected for an audit. In addition, a case may be chosen for an exception audit defined as an audit of a case with income or expenses above a statistical norm. A debtor’s audit, which a third party performs, involves verifying the income, expenses, and assets reported by the debtor, the bankruptcy schedules, and income statements and tax returns.

A debtor must provide supplemental information and records and cooperate with the audit firm. Debtors are not charged for the audit, and the information provided to the auditing firm is delivered as if it were under penalty of perjury, just as they provided the information on the bankruptcy petition. An audit firm makes a report concerning the audit results, which could conclude no material misstatements. However, it can also conclude the Debtor has made material misstatements on their Petition, and if the audit concludes there are material misstatements, a notice is provided to creditors and the trustee that there were material misstatements found in the debtor’s petition. The report itself is not a legal determination, and the effect of the auditor’s findings are not conclusive but a question of fact for the court.

I have had, in my practice, only two clients audited. One was expected because my client had an extremely high income. He also had extremely high business debt. My advice and recommendation to him was to be prepared for an audit. He was also a sole proprietorship, and the information will set off alarms for the trustee. I’m happy to report in that case that the auditing firm concluded that there were no material misstatements.

In another case, one of my clients who also operated a sole proprietorship. I believed there might be some measure of non-coincidence to selection for an audit because in sole proprietorships, very often, there is intermingling of an individual’s expenses versus business expenses. I am conscientious about letting them know that they have, in my view, a higher chance of being audited. In the case of the other sole proprietor, there was a conclusion that there were material misstatements due to the audit. Still, nonetheless, that client received a discharge because the material statements were not of such a level that any particular creditor choose to file a non-dischargeability complaint. After discussing with Auditor’s report the United States Trustee’s Office, they thought it was a grey area as to the claimed misrepresentations that were identified in the report

For more information on Preference Payments In Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (908) 373-8500 today.

Michael McLaughlin, Esq.

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