We previously dissussed what preferences are and some common defenses.  Many small businesses may be wondering if there is any way to get your money, but avoid claims of preferential payment.   Unfortunately, there is no absolute, “slam dunk” way to avoid a bankruptcy preference claim risk. In general, however, the two best business strategies to protect your company in these economic times are to have a written collections policy that is strictly followed for every customer, and to watch your receivables closely.  If a customer starts lagging — getting behind the “normal” or historical payment history — then that should be a red flag, and the best advice is to put that company on a cash basis.  If you “tighten” the payment terms (net 15 instead of net 30 or increase the interest on late payments), the Bankruptcy Court may interpret this as a “change” of the payment terms, and you might lose the “ordinary course of business” defense.  A cash basis, however, might be subject to the “contemporaneous exchange” defense, as the goods or services are being exchanged for payment at the same time.   

Another situation that might reduce the amount of repayment is to provide “subsequent new value”  to the debtor.  It is like a set off.  If you receive a preference demand that is not subject to any defenses, but after (subsequent to) the payment they seek back, your company sent more goods or provided more services to the debtor, and has not yet been paid for those subsequent goods/services, then you can reduce the preference liability exposure by the amount of subsequent unpaid goods/services. 

Although this does reduce the preference liability, companies don’t like to be in this position, because they are not getting paid full value for any of the goods/services provided. 

One final tactic may be to demand alternative sources of recovery for you, such as co-borrowers, or guarantors of the debt. A good creditors’ rights attorney can properly identify which of these strategies may be useful in your particular situation.

Tags: bankruptcy, bankruptcy filing, bankruptcy protection, Chapter 11, chapter 13, chapter 7, contemporaneous exchange for new value, creditor, creditors, creditors rights, debtor, debtors, defenses, insolvent, ordinary course of business, Preference, preference demand letter, preferences, Section 547, Section 547c, trustee

This entry was posted on Wednesday, May 27th, 2009 at 7:30 am and is filed under Preference, Proof of Claim, bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.