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Payback Time: Avoidance of Bankruptcy Preferences Overview. For nearly a century, American bankruptcy law has consistently permitted the trustee of a bankrupt debtor (or the debtor-in-possession) to avoid preferential transfers that favor one creditor over others. In the context of outsourcing, a customer's bankruptcy could force the services provider to pay back all money collected for services rendered within 90 days (365 days in the case of insider dealings) prior to the bankruptcy filing, except for payments for current services. What is an "Avoidable Preference"? A transfer is considered preferential if it transfers any property rights of the debtor to (or for the benefit of) a creditor for an "antecedent debt" (owed before the transfer was made), and it enables the creditor to receive more than otherwise under the Bankruptcy Code. Preferential transfers are avoidable (that is subject to legal nullification) only to the extent made on or within 90 days before the date when the bankruptcy petition is filed, and only in respect of transfers made while the debtor was "insolvent." To the extent that the creditor gave new value (such as for new services or goods), such "new value" will be deducted from the amount otherwise deemed a preferential, avoidable preference. (If the service provider is an "insider" of the customer, then the preference period is one year.) When is a Preferential Transfer Not "Avoidable"? The trustee in bankruptcy (or the debtor-in-possession) may not avoid preferential transfers to the extent they are mutually intended by the customer and the service provider to be, and actually are, a "contemporaneous exchange for new value given to the debtor." Likewise protected are payments by the debtor in the ordinary course of business or financial affaires of the debtor and the party to whom the debtor transfers the debtor's money or other property during the preference period. Solutions for Services Providers Facing Alleged "Preferences" in Outsourcing Contracts. In outsourcing transactions, the services provider will normally be able to escape having to disgorge payments made to it during the 90-day preference period. However, this assumes that the services provider has adopted various "escape" strategies.
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