by Scott Schuster

There is perhaps nothing more frustrating than when one of your customers files bankruptcy and avoids paying money that they owe your company. However, anyone that has dealt with a “preference action” knows that merely writing off a debt as uncollectible is not the worst thing that can happen when a customer enters bankruptcy. A preference action has the potential to be much worse, because it is a lawsuit by the debtor or the bankruptcy trustee against your company, seeking to recover payments that were made by the debtor to your company before the bankruptcy. Fortunately, the Bankruptcy Code provides creditors with certain defenses that can be used to defeat a preference action.

The Bankruptcy Code permits the trustee to avoid and recover from creditors payments made within the 90-day period before the bankruptcy filing. The policy behind this provision is to prevent aggressive collection activities that often force the debtor into bankruptcy. 

A “preference” is defined by Section 547 of the Bankruptcy Code as:

1. Payment on an “antecedent” (meaning a previously incurred as opposed to current) debt;
2. Made while the debtor was insolvent (meaning its assets are less than its liabilities);
3. To a non insider creditor, within 90 days of the filing of the bankruptcy;
4. That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.  

Section 550 of the Bankruptcy Code allows the trustee to avoid and recover any preference payments by filing a lawsuit against the creditor.

Typically, a preference action is often preceded by a “demand letter” from the debtor or the trustee. The demand letter sets forth the trustee’s claims and demands immediate payment. Often times the trustee is willing to settle the preference action for an extremely reduced amount if the settlement is reached before the lawsuit is filed. Consequently, when the creditor receives a “preference demand letter,” the creditor should always have experienced bankruptcy counsel review the case to determine whether the creditor has valid defenses. Bankruptcy counsel can often negotiate a favorable settlement and allow the creditor to avoid having to expend large sums of money in litigation.

If the parties do not reach a settlement, the preference action is initiated with a complaint filed with the bankruptcy court. The preference complaint is similar to any other lawsuit with the exception that its filed in bankruptcy court, rather than federal district or state court.

by Shawn P. McClure

“A quick question for all creditors out there. How many of you require a signature from your customers upon receipt of delivered goods? Better yet, how many of you actually deliver the goods that have been sold?

The more likely scenario is that delivery of your goods to customers is done via a “common carrier.” Generally, a common carrier is a third party business that exists for the transportation of goods and/or people. More specifically, I am referring to all of the goods that you, as a creditor, have sold and shipped to customers via FedEx or UPS.

In those cases, the customer receives the goods from the common carrier and signs for them. As we all know, this signature is often electronic. The common carrier then charges either your or the customer’s account for the shipping depending on the parties’ agreement, and business continues as usual.

Then the customer’s payments start coming late, then payments cease altogether. The customer ignores your demands for payment, and you decide to retain a creditors’ rights attorney.

Suit is filed, and your former customer, now a defendant, files a response denying that the alleged goods were ever received. Your creditors rights attorney provides you with a copy of the defendant’s response, and asks you to address the dispute regarding receipt of the goods.

Once your blood stops boiling and the cursing subsides, you respond that will simply contact the common carrier used, FedEX, and obtain copies of the signed delivery forms. However, your frustration continues to mount when you are told that your common carrier only retains records for a period of six months.

Therein lies the problem. By the time suit is filed and discovery is initiated, it is very likely that the common carrier you used for delivery of the goods has since purged their records in accordance with their own documentation retention system. Even if you were able to contact the common carrier and obtain copies of the documents, there are still a number of evidentiary hurdles present, such as hearsay, authentication and foundation.

One possible solution may be to implement a document retention process regarding signed delivery forms from common carriers into your regular business practices. This may allow you to take advantage of the “Business Records Exception” of evidence. This rule allows for the entry of certain documents, in this case the commone carrier signature documents, in cases where there is not a first hand witness, in this case the FedEx or UPS man, available to testify as to those documents. The rationale for the exception being that employees are under a duty to be accurate in observing, reporting and recording business facts, so that typical concerns regarding reliability of such third party documents are somewhat limited.

In order for a record to meet the requirements of the Business Records Exception, four general requirements must be met: 1) The record was made and kept in the course of a regularly conducted business activity; 2) It was the regular practice of the business activity to make the record; 3) The record was made at or near the time of the event that it records; 4) The record was made by, or from information transmitted by, a person with knowledge acting in the regular course of business.

While the implementation of such a system may seem like a troublesome task, once in place it could easily be maintained, and will allow you, as a plaintiff/creditor, to prove your case a lot easier.”

by Scott Schuster

Typically, the central purpose of filing a bankruptcy is to “discharge” all or most of the debtors’ debts. A bankruptcy “discharge” releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order forever prohibiting the debtor’s creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases.

However, the Bankruptcy Code sets forth an extensive list of debts that are nondischargeable. Unfortunately, nondischargeability is not automatic – a creditor that holds such a debt must file a complaint with the Bankruptcy Court seeking to have the debt declared nondischargeable. A nondischargeability complaint must usually be filed within about sixty (60) to ninety (90) days after the debtor files his or her bankruptcy petition. 

The largest category of nondischargable debts are those incurred through: 1) false pretenses, a false representation, or actual fraud; or 2) obtained through the use of a statement in writing, which is materially false regarding the debtor’s financial condition, and on which the creditor reasonably relied.

As one would imagine, the terms “false pretenses, false representations, or actual fraud” can encompass many types of dishonest behavior. An important consideration the court will make is whether the debtor intentionally and knowingly made the false/fraudulent representations. To except a debt from discharge under this section, the false representations giving rise to the debt must have been knowingly and fraudulently made. In other words, the failure to pay a debt is not sufficient, even if there is no excuse for the failure. The debtor has to incur the debt knowing that he will not be able to pay the debt, and knowing that the statements he is making to the creditor about his ability and intention to pay are untrue.

A creditor alleging fraud has the burden of proving that the debtor knew that any stated intention to repay was false and that the debtor nevertheless deliberately incurred the debt. The fact that the debtor was insolvent does not by itself provide a sufficient basis for inferring the debtor’s intent. A debtor’s honest belief that a debt would be repaid in the future, even if in hindsight found to have been very unrealistic, negates any fraudulent intent.

Use of a materially false writing concerning the debtor’s financial position comes up often in transactions that required the debtor to complete a credit application. On most credit applications, lenders will ask a debtor to list their monthly income and their current outstanding debts. Lenders then use this information to determine the debtor’s “debt-to-income” ratio. If the debtor falsely inflates their income, or omits certain debts, then the debt-to-income is inaccurate. If the court determines that the creditor reasonably relied upon the credit application in making the loan, then the debt is nondischargeable.

by Shawn McClure

As a potential creditor, you have heard this message time and time again.  Do your homework!  Prior to extending credit to a new customer make sure to obtain as much information as possible regarding this new customer’s credit history.  As a creditors’ rights attorney, I urge you to include within this initial investigation the task of finding out a little about the customer’s present operations.  More specifically, find out where this new customer currently banks. 

Customer banking information is extremely valuable in the event that the relationship sours down the road, and you are forced to take legal action to collect on an outstanding account.  Moreover, in the early stages of the creditor/debtor relationship obtaining such information should be effortless.  A new customer who refuses to provide a banking reference should at the very least raise a red flag.     

In my experience, a bank attachment is typically the fastest and most successful form of execution upon a judgment.  It gets the creditor what they want (cash), and it does so in a relatively quick manner (the bank will have twenty days from the date of service to inform a creditor of any funds that may be available).  Of course there are procedural steps that your attorney will need to take in order to receive payment, but those steps can be taken quickly.   

So if in your current practice you are not already asking new customers for banking information, begin doing so.  For existing customers, I would suggest taking the time to note where current payments are coming from.  By expending minimal effort now, you have taken steps that can drastically improve your chances of recovery in the event that the account defaults.

by Jack P. Bock

Click on this link to see Bob Bernstein talk with Kevin Miller on WPXI’s NightTalk about Bankruptcy and Get P.A.I.D.: A Guide to Getting Paid Faster (and What to do if You Don’t!)

http://www.youtube.com/watch?v=vsgGf2RIig4

Please feel free to share this link with people.

By Shawn P. McClure

“They stole from me!” “I am not taking a penny less than the full amount owed!” “I want to nail that son of a b#@^$!”  Often creditors engage an attorney to recover an amount owed from a debtor, and the creditor feels betrayed or wronged by the debtor.  It doesn’t matter whether the account debtor is a long time customer who has ignored demands for payment or a one time credit sale; these feelings of animosity toward that individual or entity are still present.  If not checked, these feelings can boil over and lead to unproductive or unnecessary litigation that only ends up costing the creditor more time and money.     

As with any service industry, one of the first duties of a creditors’ rights or bankruptcy attorney is to monitor, deal with and ultimately manage client expectations and emotions.  I would suggest that the first thing that needs to be done is to get your client in an “economical mindset.”  A creditor needs to realize that when a debtor files bankruptcy or the creditor is forced to place an account with a law firm for collection, then the account is already a loss.  For a creditor’s rights attorney the goal then becomes finding the best way to mitigate that loss and obtain the most favorable resolution for their client.

Therefore, every decision during the “recovery” process should be analyzed while taking full account of the economical consequences of that decision.  No where is that more prevalent then when deciding whether or not to initiate litigation.  Immediately filing a lawsuit without a preliminary asset search or investigation into the financial stability of your debtor can turn out to be the most counterproductive thing a creditor can do when trying to be made whole.  Likewise continuing to pursue litigation when it is obvious that there is no financial recovery to be had can only hurt a creditor’s bottom line.

Sounds simple enough.  Why do creditors continue to fall into these same pitfalls?  Emotion.  Creditors become too focused on “punishing” the debtor, and lose focus of the end goal.  Money. 

Luckily, the problems outlined above are easy to remedy.  Creditors, heed your attorney’s advice and try to avoid focusing on the emotions involved in the dispute at hand.  Attorneys, take control of the situation and make it clear to your client that pursuing certain avenues, while emotionally satisfying, will simply lead to the loss of more time and money. 

I understand that sometimes a message needs to be sent, but for those creditors who seek truth and justice in a failed creditor/debtor relationship, I would suggest visiting a house of worship.  It will be less expensive and they may have better luck.

The logic behind Pennsylvania’s arcane wage attachment laws escapes me. I cannot figure out why the Commonwealth wants to protect debtors at the expense of legitimate creditors.  What are the drawbacks to adopting more liberal wage attachment laws? Who does it hurt? The vast majority of people pay their bills, in full, when they come due and would to be affected by wage attachment. Only small minorities of people do not pay their bills and I can see no reason why the legislature would want to protect those people. Unfortunately (and inexplicably), Pennsylvania has some of the most restrictive wage attachment laws in the country.

The vast majority of states allow commercial creditors to garnish a percentage of a debtor’s wages. For example, in Alabama and California, a creditor may attach up to twenty-five percent of a debtor’s “disposable” income (i.e. income remaining after paying certain “necessities,” such as food, shelter, taxes, etc.).

Only four states prohibit or severely restrict wage attachment. South Carolina is the only state that completely prohibits wage attachment. New Hampshire prohibits “continuous attachment,” which means that creditors must file a new lawsuit each time they want to garnish a paycheck (which is rarely cost effective). Texas allows wage attachment only to pay child support.

Similarly, in Pennsylvania, wage attachment is only available to pay taxes and child support. This is particularly problematic for creditors in Pennsylvania because Pennsylvania law prohibits execution against jointly owned (marital) assets unless a creditor has obtained judgment against both husband and wife.

Two justifications have been proposed in support of Pennsylvania’s restrictive wage attachment laws. First, the legislature is concerned that wage attachment will have the effect of forcing some debtors into poverty, thereby forcing the state to bear the cost of supporting those debtors. Second, supporters believe that wage attachment is counter productive because debtors, upon receiving less of their income and having less incentive to work, quit their jobs and apply for welfare.

In the coming weeks and months, I intend to contact our local state senators and congressmen about wage attachment in Pennsylvania. There may just be support to expand the attachment laws for the benefit of all Pennsylvanians. Stay tuned . . . 

We’ve added a couple new attorneys to our blog.  Scott Schuster, an associate with the firm’s Bankruptcy & Restructuring practice area, and Shawn McClure, an associate with the firm’s Creditors’ Rights practice area.  Look for their posts in the future.

One of our top experts on Judgment Enforcement and collections, Nick Krawec, will be participating in a seminar on September 12 in Pittsburgh.  If you have an interest in this topic, Nick is one of the best!

Bob Bernstein

To Register: 

Seminar ID: 360408 Your priority code is: 306960. Please mention this code when registering. Register online at:

Lorman or By phone: Call our Customer Service Department at (866) 352-9539By e-mail:

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