Doing business with a delinquent customer? Applying current customer payments toward overdue accounts could cost you.
Our client continued to sell to their customer, even though the customer was in arrears. However, the client changed the terms, requiring payment within a few days of shipment. The payments made were meant for the “newer” transactions. However, the client chose to apply the payments towards the aged invoices rather than the newer ones as intended. That is until the client learned that doing so could be considered a “preference payment” if their delinquent customer filed for bankruptcy. Should that occur, then our client could have to return part or all of the monies received 90 days before the bankruptcy filing.
Our Client’s Situation
When our client initially called, they explained that they were doing business with their long-time customer, who was in arrears. They were building in a “little extra” on the margin to make up for some of the profits lost over the years. Our client was also selling on short terms with the understanding that shipments would stop if payment were not made.
Their delinquent customer agreed to the terms as alternate vendors were not an option. Their customer received new product and would turn around payment in a day or two. However, a bankruptcy filing was imminent. Our client wanted to ensure they recouped as much profit as possible.
Although these payments were intended for the new sales invoices, our client chose to apply the payments towards the aged balances, “the arrearage.” The payments didn’t reduce the arrearage. Our client moved the balance forward, preserving the four-year statute of limitations and their ability to lien the commercial jobs, should the debtor stop ordering and paying.
Our client was pleased, having recouped some of the lost profits. However, they didn’t realize they could be required to repay the payment amounts to the debtor’s estate when the customer filed for bankruptcy. The payments could have been considered a “preference.” Our client could have been seen as receiving preferential treatment compared to other creditors. By applying the payments intended for new purchases to an old debt, the client was realizing more than they would have in the bankruptcy. This could set the stage for the bankruptcy trustee to recoup the payments made by the customer within 90 days of the bankruptcy.
We explained to our client the likelihood of having to refund the “preference payments.” Our client changed course and applied the payments to the newer sales. By doing so, the client should be able to avoid having to return the monies. That’s because our client’s sales to the customer were a contemporaneous exchange for new value given to the debtor.
Have a debt collection matter you need assistance with? Contact Frank, Frank, Goldstein and Nager for a consultation.
