You Received a Preference Demand Letter . . . Now What?

If you receive a letter from a bankruptcy trustee or Chapter 11 debtor in possession demanding that you or your business repay a “preference” or preferential transfer, there are a few things to know and do right away.  First, a preferential transfer does not mean you did anything wrong.  Recovering preferential transfers is a mechanism available to trustees/bankruptcy estates to further the Bankruptcy Code’s goal of fair distribution of a debtor’s assets.  The concept is that if certain creditors were paid in the months leading up to a bankruptcy while others were not, the payments should be recovered and distributed pro rata.  Second, there are potential defenses available.  Just because the trustee demands repayment does not mean you are liable.  Third, immediately preserve all documents and data relating to the preferential transfer and the transaction for which it was received—such documents will be needed to assess any defenses you may have.  Finally, seek legal advice early on.  Even if you respond to a preference demand letter yourself, getting an attorney involved in the early stages will put someone between you and the bankruptcy trustee/debtor in possession and could save you money if the demand can be resolved before a lawsuit is filed.

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