Preference Period
What is the Preference Period?
The preference period is considered to be the 90 days preceding the date of the bankruptcy. If you’re an “insider” it’s one year. These are not working days, they are calendar days and it may vary from state to state if it includes the day of filing for the bankruptcy or not.
But put simply, during this time frame the law will make you return any money paid out by the business or individual if they (the trustee) consider it a preference – if you don’t have an adequate defense. From their point of view (the way they say it) is that they are seeking to, “avoid the transfer” or an “avoidance of the transfer” back when it was made. Meaning you shouldn’t have gotten that payment/transfer and you now have to give it back.
If the amount they’re asking you to return would be a burden to you and you have no defense against it: Call an attorney – yesterday. They have a much better shot at settling the action or defending you.
First, I’m not an attorney. But I’ve had to defend against a bankruptcy trustee going after me for payments to the tune of over $526k made to my corporation that they considered preferential transfers or payments. This website is my story. You can read all the same lawyer-speak over and over until you want to puke elsewhere – but this is the real-word experience of what happened. I’m going to be covering a tremendous amount of ground, so you may want to bookmark now or save for later.
Disclaimer: Don’t take anything I say as correct, because I could be wrong about any and everything I say and nothing I say here constitutes legal advice. Do your own due-diligence and hire an attorney.
What Happens When a Company/Person Files Bankruptcy
From what I understand, (depending on the type of bankruptcy) an impartial trustee is appointed to oversee how things are handled. And one of the first things they do is look at the bank records and automatically mail off a letter – like the one you probably received – to every single person and/or company that received ANY payment during the “preference period” of 90 days from the date of the filing of bankruptcy.
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Don’t take it personal. They don’t look into if your payment was preferential or not. I believe the burden of proof is on you for some reason. Special – huh? And you are probably a creditor at this point as well. Meaning the bankrupt entity owes you money and you sent in the proper paperwork to get your share when everything is said and done, right?
After doing an immense amount of research and going through rage and anger at, “How dare they ask for this money back…” etc… I realized the whole point of a bank trustee trying to get back any money sent out during the last three months of the bankrupt company doing business: It’s because they might have known the end was coming and paid special companies/persons that they shouldn’t have.
So if the entity owed you ten thousand dollars when they went under and afterwards you find out that this entity paid XYZ Co. their ten thousand dollars (because they “preferred” them for some reason) that wouldn’t be fair. It’s the trustee’s responsibility to get that money back and then dole it out to all the other creditors, including you. Great – right?
Not when YOU have to give the money back and you KNOW it wasn’t a preferential transfer. Fortunately, the law also understands that not all payments made during the preference period are actually preferential. You and your attorney have to come up with a “defense” if it’s applicable. There’s three main defenses to defending this and we’ll go over each one. But remember, I’m not an attorney and all I can speak of is my opinion, experiences and what I’ve researched from the standpoint of a business owner.
But I feel your pain. If I had to return 90 days worth of commissions paid to my company a year and a half prior, I would have been completely devastated financially as well as all my employees. I mean, it didn’t make sense. Anyway, we’ll get into all that as we go along.
Please chime in on any or all pages in the comments with your experience or correct me if I’m wrong. But if the amount is not negligable to you, the best thing you can do right now is talk to a lawyer. But first, lets see if it was a bankruptcy preference to begin with.