If you own a business and you're about to go bankrupt, you know the wisdom of making strategic decisions so that you come out of the situation as financially intact as possible. But you could make a big mistake if you don't understand the rules about preferential transfers.
Here's what you need to know in advance to avoid problems:
What's a preferential transfer?
In essence, a preferential transfer means that you showed favoritism to one creditor over another by prioritizing the debt you owe that creditor over your other debts.
This often happens when small business owners have a personal connection with a creditor and feel morally and emotionally obligated to make good on a bill or loan.
For example, imagine that your father-in-law gave you an unsecured loan to get your business through what looked like a rough patch. Unfortunately, the rough patch continued longer than you expected, and your business became insolvent. Because of your relationship with your father-in-law, you took steps to make sure that he was repaid -- even though you couldn't do the same for your other creditors prior to filing bankruptcy.
In that circumstance, the bankruptcy trustee can actually file suit against your father-in-law and demand that the money you repaid be turned over to the bankruptcy estate for fair distribution.
What are the limits on preferential transfers?
To keep the playing field fair in a bankruptcy, there are different rules depending on the particular creditor involved. Payments to regular creditors within 90 days prior to your bankruptcy petition can be scrutinized. For "insider" creditors (like a father-in-law), however, the court can look back over your transactions for an entire year.
Preferential transfers are just one of the traps for the unwary in bankruptcy law -- and just one of the reasons it is wise to get plenty of experienced advice as soon as you suspect that you need to file a bankruptcy petition for your business.