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Defending against preference actions in bankruptcy

It is one thing for a customer declaring bankruptcy to discharge its debts to you as uncollectable. But there is an even worse outcome that can occur, called a preference action.

You know you are in a preference action when your company receives a letter of demand from either the debtor or the trustee. The demand is for immediate payment. It will feel like money is going in the wrong direction, and it is.

A question of fairness

The idea behind preference actions is fairness. If a client pays his bills just before filing for bankruptcy, that client can demand that the money be handed back, so that the eventual bankruptcy does not reward creditors whose aggressive tactics may have pushed the client into bankruptcy in the first place.

Bankruptcy law allows the trustee in the bankruptcy proceeding to demand that payments made within a 90-day window prior to the filing be returned. This does not feel like fairness, refunding payments rightfully made to you.

There are numerous defenses against preference actions. Creditors can:

  • Establish that payments made were done in the ordinary course of business.
  • Show that it accepted a preference payment – and then provided the customer with good or services representing new value.
  • Show that payments received werecontemporaneous exchanges for subsequent new value.  

Working any of these defenses requires creditors to prove their cases.

When we defend your company against preference actions, our approach is to demonstrate that your transactions were made in good faith and should not be penalized in the bankruptcy process.

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