If a Debtor owes ten creditors $100,000.00 each and uses all his money to pay off one of the creditors in full this is called a preference. It is legal and does not violate the law. However, if that one Creditor files bankruptcy within 90 days the Trustee will file an Adversary Proceeding against the favored Creditor to recover that $100,000.00. He will not claim that the Creditor did anything improper. He will simply allege that Bankruptcy Law allows him to recover this $100,000.00 from the Creditor to be shared proportionally with all the other Creditors. In this example each Creditor will get ten cents on the dollar.
A preference lawsuit is infuriating because this Debtor probably owes you a great deal of money and now the Bankruptcy Trustee is asking you to give back even more money that was paid to you on a legitimate debt. Fortunately there are many defenses to an Adversary proceeding that seeks the return of a “Preference”
The Bankruptcy Code wants to make sure that struggling Debtors are not forced into Bankruptcy because Creditors and Suppliers will not do business with them for the fear of a Bankruptcy followed by a lawsuit for the return of a “preference” Therefore payments made in the “Ordinary Course of Business” do not have to be returned as a preference. And late payments on the eve of bankruptcy often are protected if the struggling Debtor has established a new "Ordinary Course of Business" with your business and/or other businesses.
There are many other additional defenses. Payments for goods that are shipped right away are not Preferences because they are contemporaneous exchanges for value. ie the Debtor gives you two ten dollar bills for a twenty dollar bill. Also you get credit for goods that were shipped but not paid for after the “preferential payment”.
Finally, our office has been very successful in defending Preference Actions based upon arguments that make sense but not in the arsenal of most bankruptcy attorneys, eg “The money the Defendant received was paid for costs that benefited the Debtor” and “The Debtor and the Defendant had an agreement to keep doing business with each other after the bankruptcy (usually a Chapter 11) was filed, which agreement was approved by the Court.