From The KDDK Advantage
- February/March 2008
Bankruptcy Preference
Claims:
Getting Paid May Not be End of the Story
Many of our clients have
experienced how difficult it can be to collect money
on past due accounts from struggling customers. Eventually,
whether as a result of constant pressure from the vendor
or a court order, payment may finally be made by the
struggling company — and the vendor thinks the problem
is solved.
But if the struggling
company is forced to file bankruptcy within three months
after that payment was made, the innocent vendor could later find that it is
subject to a “preference claim” and must give back the money it received from
the bankrupt company. Often these preference claims are brought more than two
years after the money was paid, to the surprise of many creditors who had thought
their problems with the now-bankrupt company were over.
These unfortunate creditors
are being hit by preference claims because the Bankruptcy
Code was designed not only to provide relief for failing
companies,
but also
to protect these companies’ creditors by ensuring they are treated relatively
equally in the event of bankruptcy. The preference claims are one way the
Bankruptcy Code prevents the debtor from favoring certain
creditors prior to filing for
bankruptcy protection. This is done by taking money from those that were
paid during the preference period and redistributing
it to all of the creditors
in proportion to their claims against the debtor.
Thankfully, the 2005 amendments to the Bankruptcy Code
lessened the burden of proof and provided other changes
to assist creditors in defending against
preference
claims. Under the old law, the creditor had to establish two conditions
to prove that a payment wasn’t preferential: 1) That
the payment was made during
the ordinary
course of business; and 2) That the payment was made on terms considered
standard in the debtor’s industry. Under the new law, the creditor only
has to prove
one or the other condition, rather than both. The new law also provides
additional protections to creditors who receive small
preference payments.
Creditors
cannot always anticipate that a customer will file for bankruptcy, but
the best strategy is to attempt to collect all debts
on a timely basis,
before they grow too old. Creditors can avoid being hit by preference claims
in the
future by asking for cash on delivery or payment in advance. Both types
of payments are exempt from the preference provisions
of the Bankruptcy Code.
Michael
DiRienzo’s practice areas include bankruptcy, collections & creditors
rights and business law. Contact Michael at mdirienzo@kddk.com or 812-423-3183
for more information about 2005 Bankruptcy Code amendments
that can limit vulnerability to unexpected preference
claims.
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