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Avoiding preference claims in your business bankruptcy

| Mar 23, 2021 | Bankruptcy |

Even though your business is facing bankruptcy, you hope to rebuild. You have a plan in place, and you expect to come out of the process better than before.

A preference claim from the trustee in your bankruptcy case could pose a serious issue, however. Understanding how to avoid this problem is  key to your future.

What’s a preference claim?

Essentially, the bankruptcy trustee has the power to look back over your company’s financial dealings for a period of 90 days (or longer, in some cases) prior to the filing of your petition. If the trustee believes that you unfairly showed “preference” to one of your creditors during that time, the trustee has the power to demand the return of the assets or money you paid.

For example, maybe you owed a big bill to an important supplier. You were concerned that rolling that debt into your bankruptcy would end your relationship with that supplier and limit your future prospects. Just before you filed for bankruptcy, you paid their bill in full. That’s preferential action and is unfair to your other creditors.

Are there any defenses to a preference claim?

First, it’s up to the trustee to prove that your payment was preferential — but you also may be able to assert some affirmative defenses. These include:

  • The payment was made in the ordinary course of business, under similar terms and conditions that are normal for your industry and not the result of aggressive collection efforts by the creditor.
  • The payment was for new goods or value, not an old debt — which can apply if you paid the bill, for example, so your supplier would advance you new materials you needed for your operations.
  • The payment was for a contemporaneous exchange, meaning you paid your creditor at the same time you received new goods or services from them.

Often, the biggest complication faced by small businesses when they file bankruptcy is the lack of information about their rights and limitations. Working with an experienced Jacksonville attorney can make the entire process much easier.