Bankruptcy Preferences - An Introduction

Today I spoke to a credit manager with an interesting problem. He called to discuss a letter he received demanding the payment of almost $400,000 from a customer that is in bankruptcy. Adding insult to injury, the customer still owes over $75,000 on its account. What a paradox! What my credit manager friend just received is called a Preference Demand Letter.  Dealing with preferences is one of the most common encounters with the bankruptcy process for today’s Credit Professional, and preference litigation is the most common type of adversarial proceeding in bankruptcy court.

Certain payments within 90 days (1 year if the payee was an insider) of the date of the filing of a bankruptcy petition may be considered preferential and are potentially recoverable by the bankruptcy estate.

The whole notion of the return of preferential payments under the Bankruptcy Code is the “fair and equal” treatment of all unsecured creditors. This is accomplished in a “Water Leveling” process in which property (money) is recovered from the recipients of preferential payments for the benefit of the estate. It does not seem very fair when you’re the one asked to pay back money from a company that still owes money.

I am going to discuss this subject on a regular basis here, so continue to check back if it is of interest. We will be discussing the elements of a preference as well as how they are prosecuted and defended.

If you’ve received a demand, don’t ignore it, be proactive and seek the advise of counsel experienced in these matters.  If you like, please call my office.  We are experienced in the analysis of these matters and can possibly refer you to experienced legal counsel.