Being a creditor that isn’t getting paid can sometimes feel like a losing battle. Often, the worst-case scenario happens after a creditor has finally received some payment only to have the debtor file for bankruptcy and then, all of the sudden, the trustee in bankruptcy wants that money returned!
Under the Bankruptcy Code, this is called a preference claim and it happens all the time. The bankruptcy trustee can claim entitlement to funds received by a creditor in the 90 days before a bankruptcy filing, as a “preference,” if the amount received is more than the creditor will ultimately be entitled to receive from the debtor during the bankruptcy. Of course, not all bankruptcies lead to debtors asserting a preference claim. But a preference claim can certainly put a creditor in an unexpected financial situation.
Whether you will receive a demand to return an alleged preference payment depends, in large part, on actions taken after the debtor's bankruptcy filing. As a general rule, preference claims must be filed within two years of a bankruptcy filing, but that deadline can be longer in certain circumstances. One of the primary indicators of an impending preference claim is whether the debtor-company will be reorganized or liquidated. If the corporate debtor is being reorganized, preference claims are less likely to occur. In contrast, if it is being liquidated, preference claims are more likely to arise.
Although preference payments usually involve the payment of cash by the debtor to its creditor, a wide variety of transfers may qualify as a preference. Preference claims may seek to recover direct payments, reimbursements, escrow agreements, third-party payments, liens, savings certificates, real estate, or other assets.
What should a creditor do if faced with a preference claim? There are several things you can do to improve your odds of avoiding disgorgement of any or all of the alleged preference:
Martin Pringle bankruptcy attorneys are experienced in assisting creditors navigate the bankruptcy process and maximize potential returns. We can keep you apprised, take action, monitor the bankruptcy, negotiate, and create a favorable outcome when you are faced with a preference demand or lawsuit.