What to Do When You Are Sued on a Preference Claim


Under the bankruptcy laws, certain payments made by debtors within a specific time frame before a bankruptcy filing are known as “preferences.” The federal bankruptcy code allows a trustee to seek reimbursement of any payments made by a debtor within 90 days before the filing of the bankruptcy petition.

The payment must be made on a debt that was incurred before the bankruptcy filing. The 90 day period only applies to someone not considered an insider—someone not related to the debtor or who has the ability to control the activities of the debtor. If the payment is made to an insider, the time period for a preference is a year.

If you’ve been paid by someone who subsequently filed for bankruptcy, you can be at risk of a lawsuit by the trust to recover the funds paid to you. It’s important that you don’t simply dismiss the lawsuit out of hand. There are defenses you can raise, but you have to be prepared. You’ll want to present the trustee with all the relevant facts to support your claim.

Here are some of the defenses that you can make:

  • You gave something new of value for the money you received—a preference only applies to payments made for prior debts. If you delivered new goods or services and the payment was for those goods or services, it’s not a preferential payment.
  • The payment was in the ordinary course of business—If you can show that the payment was simply one in a series of payments as an ordinary part of business, you may be able to avoid repaying it.

If you believe the payment was subject to the rules governing preferences, your best option is probably to seek to negotiate a settlement as soon as possible.

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