Minimizing Preference Exposure – Require Prepayment For Goods Or Services

One question that clients often ask is what measures can be taken to reduce preferential exposure when dealing with a company that is sliding into financial insolvency.  Under Section 547 of the Bankruptcy Code, a debtor or trustee can seek to avoid and recover payments made to a vendor that provided goods or services to the debtor in the 90 days prior to the filing of bankruptcy.

It is important to take into account the fact that in order to demonstrate that a payment is "preferential", the elements of Section 547(b) of the Bankruptcy Code must be met.  One of the elements that must be satisfied, among others, is that the transfer was made "for or on account of an antecedent debt owed by the debtor before such transfer was made".  11 U.S.C. Section 547(b).