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Contemporaneous Exchange for New Value Defense (Bankruptcy)
Understanding Contemporaneous Exchange for New Value Defense (Bankruptcy)
Definition & Meaning
The contemporaneous exchange for new value defense is a legal protection available to creditors in bankruptcy cases. This defense applies when a creditor is facing a preference action, which is an attempt by a bankruptcy trustee or debtor in possession to recover payments made to the creditor before the bankruptcy filing. Under this defense, a creditor can argue that a payment received was a fair exchange for new value provided to the debtor at the same time.
Table of content
Legal Use & context
This term is primarily used in bankruptcy law, particularly in preference actions. Creditors may utilize this defense to protect themselves from having to return payments they received shortly before a debtor filed for bankruptcy. It is essential for creditors to understand this defense as it can significantly impact their financial recovery during bankruptcy proceedings. Users can manage related forms and procedures with resources like US Legal Forms, which offers templates drafted by experienced attorneys.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A supplier delivers goods to a retailer and receives payment on the same day. If the retailer later files for bankruptcy, the supplier can use the contemporaneous exchange for new value defense to protect the payment received.
Example 2: A contractor completes work for a client and is paid immediately. If the client subsequently declares bankruptcy, the contractor may assert this defense to avoid returning the payment. (hypothetical example)
Relevant laws & statutes
The primary statute governing this defense is 11 U.S.C. § 547, which outlines the conditions under which a transfer may be considered a preference and the defenses available to creditors.
Comparison with related terms
Term
Definition
Key Differences
Preference Action
A legal action to recover payments made to creditors before bankruptcy.
Focuses on the recovery of payments, while contemporaneous exchange defends against such recovery.
New Value
Value provided to a debtor in exchange for a transfer.
New value is a component of the contemporaneous exchange defense.
Common misunderstandings
What to do if this term applies to you
If you are a creditor facing a preference action, consider gathering evidence of the contemporaneous exchange, including contracts, invoices, and payment records. You can also explore US Legal Forms for templates that can help you manage the legal process. If the situation is complex, consulting with a legal professional is advisable for tailored guidance.
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