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Creditors face unanticipated risks when customers file for bankruptcy protection. One such risk is “preference liability,” where the bankruptcy estate seeks to claw-back payments made to a creditor within the 90-day period before the bankruptcy filing. In this circumstance, a creditor’s first notice of its potential obligation to pay back such “preference” payments is the receipt of a demand letter.
Understandably, the receipt of a preference demand letter may be met with frustration and possibly anger by a creditor that rightfully provided its customer with goods or services. Receiving a demand letter, or even being served with a complaint, however, does not mean that the creditor will be required to pay back the funds in question. Rather, the U.S. Bankruptcy Code contains several provisions that, if correctly used, can shield a creditor from “preference” liability. In fact, in December 2020, creditors received an additional, powerful tool that, if properly used, will protect certain creditors who attempt to work with a distressed customer by permitting the customer to enter into a payment plan for amounts overdue on a nonresidential real property lease or a supply agreement.