Let’s say someone owes you money. You know they’re having financial difficulties, so you go to them and try to get them to pay it back to you before they file for bankruptcy. You have a good relationship with them and they’re kind enough to make sure you get paid back.
Three weeks later, the debtor files for bankruptcy. “Whew!” you think. At least I got my money back before they filed.
Several months later, you get something in the mail saying that the trustee representing the debtor’s estate is suing you to recover the money the debtor used to repay you.
“What the…?!” you think. That was money rightfully owed to you. What kind of crazy logic says I have to give it back?
The answer is that the money you were repaid may have been a “preference payment.” And preference lawsuits happen all the time.
In a nutshell, a “preference payment” is any payment or transfer of value that a debtor makes to you in connection with a pre-existing debt, during the 90-day period before the debtor files for bankruptcy. The idea is to prevent debtors from circumventing the bankruptcy process and also to prevent creditors from pushing to the front of the line ahead of other equally situated creditors. Otherwise, a debtor could transfer all of its assets to one creditor, then file for bankruptcy and leave all the other creditors with nothing. So the bankruptcy code allows the trustee representing a debtor’s estate to reach back 90 days prior to the bankruptcy filing and recover any preferential payments.
How do you know if you received a preference payment?
For a trustee to succeed with a preference lawsuit, it must prove the following:
- There was transfer of an interest in the debtor’s property
- It was made within 90 days of the date that the debtor filed for bankruptcy (within one year if you are related to the debtor, or to the owner of the debtor)
- It was made in connection with a prior existing debt
- It was made while the debtor was insolvent (the debtor, however, is presumed to have been insolvent during the 90-day period), and
- It results in the creditor receiving more than it would otherwise receive if the debtor’s assets were sold off in a liquidating process, and the proceeds were distributed equally among all creditors.
You don’t need to be an expert on preference payments. That’s what bankruptcy lawyers are for. However, you do need to take it seriously if you are the subject of a preference lawsuit and you need to be aware that these do occur and may affect you. Also that they can happen many months after a bankruptcy case has commenced.
If you’re facing a preference lawsuit in New York (or Brooklyn or Suffolk County, Long Island) in connection with a bankruptcy, and you have questions about what to do, get in touch with us for a free consultation and make sure you respond to it properly and protect your own interests. Reach us at www.nybankruptcy.net.