What You Need to Know about Preferences: Practical Considerations for Lessors

The pain of a preference action is much easier to accept in those situations where a creditor knowingly accepted a preferential transfer, but did so in the hope that a bankruptcy would not be filed or the preference suit would never be commenced. This occurs when a lawyer was consulted before the collection efforts were made, and the creditor was advised that the collection process might actually result in the recovery of funds that may have to be repaid if the obligor files for bankruptcy 90 days hence. We have seen a glint in the eye of many a client when deciding whether to accept a payment, or additional collateral from a financially strapped customer when we use the old adage: “Real men take preferences, wimps file proofs of claim.” Of course, the advice to knowingly accept a preferential transfer should only be given after consideration of the cost of obtaining the potentially preferential transfer. If legal action has to be taken to obtain a judgment or the leverage necessary to get payment, the cost may not be justified if a bankruptcy filing is inevitable. Often the creditor has very little information that will allow it to predict with any amount of accuracy the likelihood of a customer filing a bankruptcy petition in the succeeding 90 days.