What’s a bankruptcy preference claim?

| Sep 28, 2020 | Preference and fraudulent transfer litigation |

You own a business, and that business needs to keep its cash flow moving at all times in order to stay afloat. Naturally, when a long-term client or customer doesn’t pay their hefty bill, that’s a problem. You start making phone calls and get gradually more insistent until that particular person finally sends you the money.

About a month later, the reason for the delayed payment becomes clear: Your customer or client was having serious financial problems and they filed for bankruptcy. Days after that, however, you get a letter in the mail telling you that you need to send back the money you were paid — otherwise, you may be subject to a bankruptcy preference claim.

What just happened? Well, you have probably unwittingly fallen into a trap that you really couldn’t avoid. Under Section 11 U.S.C. § 547 of the Bankruptcy Code, a debtor that’s about to seek bankruptcy protection can’t treat their creditors unequally by choosing to pay some and not others. If a debtor pays off their bill to a specific creditor within 90 days of filing for bankruptcy, the trustee has the ability to “claw back” that payment.

There are two main purposes to the rule. First, it makes the bankruptcy process fair for all the creditors. If any money or assets are to be divided, each creditor should get an even distribution. Second, it keeps the most aggressive creditors from trying to essentially bully or guilt the money they’re owed out of a debtor’s hands right before they go under.

You don’t have to immediately cut a check when you get a demand letter threatening a preference action, however. Quite often, there are defenses available. Talk with an experienced attorney here in Austin about your situation.