What is a Preference Payment?

Most purchase orders set forth the terms of payment.  Sometimes a down payment is expected at the time the order is placed.  Sometimes a second payment is expected before shipment.  And generally a final payment is expected within a certain number of days following receipt by the customer of the product and the final invoice.

Does this mean you always get paid on time?  Of course not.  It is not uncommon for customers to fall behind in their payments.  If you don’t charge interest on late payments, customers may decide to use you like a bank.  It is cheaper for customers to make you wait for payment than borrow money to pay you off.  And in these tough economic times, for many customers, getting a bank loan is out of the question. 

Often you have to follow up your invoice with polite reminders, late notices, collection letters, and finally threats to sue in order in order to get paid.  Worse, when you finally do get paid, you aren’t out of the woods yet.  If your customer goes bankrupt within 90 days after you received a payment, the bankruptcy trustee will often seek to recoup that payment as a “preference.”  Under bankruptcy law, the trustee has the authority to require you to return all preference payments so that such monies are included in the bankruptcy estate to be divided among your customer’s creditors (maybe including you) based on their relative priority.

There are some defenses available to the preference claim.  One defense is based on “new value” you gave to the customer in exchange for the payment you received.  Another defense is available if the payment was received in the “ordinary course of business” between you and your customer. I'll talk more about these preference defenses in the next Blog.

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AND ONE MORE THING.     Herman Cain the current GOP front-runner is advancing a new tax plan called 9-9-9 to replace the current federal income tax code.  Under this plan, individuals would pay income tax at 9% on all income with limited deductions, corporations would pay income tax at 9% and everyone would pay a national sales tax at 9%.  Details are still leaking out about the 9-9-9 plan.  What do you think of 9-9-9?  Let me know.  Jsenney@pselaw.com or 937-223-1130.

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