Why Trustees Pursue Preference Actions
Preference actions are not personal—they are procedural. The trustee’s role in bankruptcy is to collect and distribute the debtor’s assets in a way that is fair to all debtor’s unsecured creditors.
Reclaiming preference payments allows the trustee to “level the playing field.” If one creditor receives payment in full while others receive only a fraction of what they’re owed (or nothing at all), the trustee may intervene and recover that payment to ensure uniformity in creditor treatment.
These actions also discourage creditors from pressuring financially struggling debtors to pay creditors before others—a situation that could worsen the debtor’s financial condition and reduce the pool of debtor’s assets available for all.
How to Respond to a Preference Demand Letter
Receiving a demand letter from a bankruptcy trustee can be unsettling. It’s important not to panic, but rather to approach the situation with clarity and caution. Here’s how to respond effectively:
1. Review the Letter Carefully
Start by understanding exactly what the trustee is requesting. Take note of:
- The amount being demanded,
- The date(s) of the transaction(s),
- The nature of the underlying debt or obligation.
Compare this information with your own records and bankruptcy forms (if applicable) to verify the accuracy of the trustee’s claims.
2. Contact a Bankruptcy Attorney
Time is critical in these cases. Engaging legal counsel familiar with bankruptcy court procedures in Tennessee will give you the best chance of navigating the situation successfully. Your attorney can determine whether the payment actually qualifies as a preference under the law and whether you have any valid defenses.
3. Gather Supporting Documentation
The more records you have, the stronger your position. Collect:
- Invoices,
- Bank statements,
- Correspondence with the debtor,
- Proof of goods delivered or services rendered.
This documentation will be essential in establishing the context of the payment and whether it fits into an exemption category.
4. Evaluate Settlement Options
Even if the payment qualifies as a preference, it may be possible to negotiate a reduced repayment or a debt settlement. Trustees may be open to compromise to avoid prolonged litigation. A skilled attorney can assist in these negotiations.
Common Defenses to Preference Claims
Fortunately, the law provides several statutory defenses that can protect creditors from having to return payments:
1. Ordinary Course of Business
If the payment was made in the regular course of business, according to ordinary industry or historical standards, it may be exempt. For example, if your client consistently paid invoices every 30 days, and the payment in question followed that same pattern, you may qualify for this defense—even if the client’s debts were primarily consumer debts.
2. New Value Defense
If you provided additional goods or services to the debtor after receiving the payment—and those services were not yet paid for—this “new value” can offset the trustee’s claim. This defense encourages continued business operations and credit extensions to struggling businesses, even when those businesses are overwhelmed by primarily consumer debts.
3. Contemporaneous Exchange for New Value
If the payment was made at the same time goods or services were delivered (i.e., a COD transaction), it may not be considered a preference. The key here is that the exchange must be intended and actually executed as a contemporaneous transaction.
4. Subsequent Transfers or Reinvestment in the Estate
In rare cases, if the payment was reinvested into the debtor’s business or used to directly benefit the bankruptcy estate—such as covering secured debt payments or operating costs—it may fall outside the scope of a preference claim.
If you need help in qualifying for bankruptcy in Tennessee, reach out to our experts now!
