It’s bad enough when you can’t collect everything you are owed because of a customer’s financial problems. We’ve all faced that situation at one time or another. Unfortunately, the U.S. Bankruptcy Code can add an entirely different wrinkle to the problem called a "preference." (The word comes from the idea that your successful collection efforts enabled you to get preferred treatment over your customer’s other creditors that didn’t get paid.)
Without some planning, an unhappy scenario can develop even if you aggressively move to collect the account. If the customer files for bankruptcy, the customer’s bankruptcy trustee — or even the customer itself — may sue you to recover those payments you were lucky enough to collect, calling them preferences.
There are defenses and, with some careful planning, you can act to protect yourself. These range from waiting to ship new goods or provide new services until after you’ve received a payment to putting the customer on C.O.D. or other payment in advance arrangement. Here are some pointers on minimizing the bankruptcy preference risk.