Bankruptcy Preferences: What do you mean I have to give the money back?
Posted by: Martin Seifert
April 21, 2011
Topic: Bankruptcy Law
Haller & Colvin attorney and Bankruptcy Trustee Martin Seifert explains why some businesses might have to return money collected from customers who later file bankruptcy.
You have already received the bad news. Maybe in the past year or two your customer filed bankruptcy and left you with an outstanding bill. Perhaps the only good news is that the customer paid you something shortly before the bankruptcy was filed, so at least you did not have to realize that loss; but then you receive a demand letter to return those funds. What does this mean?
Most businesses have already been on the receiving end of a preference demand or complaint. Under the Bankruptcy Code, many payments made by a debtor in the 90 days prior to the filing of the bankruptcy (one year if the payment is to an insider) can be recovered by the Trustee of the Debtor as a preference.
11 U.S.C. §547
The basic factors are whether or not the payment was for a debt and was received by the business within 90 days before the filing. As long as those factors are met, the payment may very well be a preference.
There are defenses, however, to the demand. These are commonly known as the contemporaneous exchange for new value defense, the subsequent new value defense and the ordinary course of business defense. Secured creditors have another defense as well. If you receive a preference demand, please call one of our bankruptcy team members. We can help you analyze your defenses and reduce the cost to your business.
The contents of this blog post are intended for general information purposes only and should not be construed as legal advice.
