December 10, 2015
Many litigation issues arise because of a debtor’s inability to pay his bills. Any short cut made by the debtor to keep his or her head above water can lead to litigation. Counsel should be aware of the debtor’s financial status before considering settlement. Only proactive planning by counsel can protect the settlement payments from bankruptcy. Settlement proceeds may be considered property of the bankruptcy estate and any transfer of that property is considered a preference, which is avoidable by the trustee.
The recipient of the settlement proceeds may be subject to preference litigation. Pursuant to 11 USC 547, the trustee may avoid such transactions. In order to avoid such payments, the trustee must demonstrate that the payments (1) were of the debtor’s properly; (2) were made to or for the benefit of the creditor; (3) were made for or on account of an antecedent debt; (4) were made while the debtor was insolvent; (5) were made within 90 days before the bankruptcy was filed (or one year in the case of an “insider”) and (6) allowed the creditor to receive more than the creditor would receive in the bankruptcy had it not received the payments. 11 USC 547. To protect a payment made pursuant to a settlement agreement from being avoided by the trustee, counsel should consult with a bankruptcy attorney at Keller & Almassian about how to structure the payment to preclude the payment from being avoided.