Preferences

Bankruptcy term. Most bankruptcy statutes seek to ensure that all creditors of a bankrupt are treated equitably. However, realistically, most insolvent companies, as bankruptcy approaches, tend to treat some creditors better than others, perhaps because they can apply more pressure, moral, personal, or otherwise. To solve this problem, bankruptcy statutes usually provide that payments made within a certain period before a party files for bankruptcy be “clawed back” by the bankrupt and then redistributed to creditors equitably, (e.g., if you received “dollar for dollar,” you may need to give the money back and join the queue for “cents on the dollar.”) Pre-bankruptcy payments that are treated this way are called preferences.

To be a preference the payment usually has to be within a time period (Sixty or ninety days) before the bankruptcy filing for ordinary creditors, or a much longer period for creditors with some connection with the bankrupt (i.e., shareholders, relatives, senior employees etc.), typically at least a year. Payments in the ordinary course of business can often avoid being treated as preferences. When in a dispute to recover debt from a company that may be heading into insolvency, it is important to be aware that a later win of a larger amount may be pyrrhic, if that puts the settlement into the ninety/sixty-day preference window.

Since bankruptcy trustees, receivers, and administrators tend to automatically send out letters demanding returns of payments made during preference period without determining whether the payment meets other legal criteria to be considered a preference, re-payment of alleged preferences should not be automatically made before qualified, specialist legal advice has been obtained.

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