Receiving a clawback demand letter from the bankruptcy court can be disheartening because it means the trustee is coming after money a client recently paid you—the money you worked hard to earn. With some research and preparation, though, you may be able to stop the trustee from taking the cash. Here's what you can do.
1. Check Your Records
There are a few defenses you can use to protect your business from a clawback cash grab, but they require you to dig up important information about the client. Specifically, you need to know when the client made the payment, the amount, and the type of payment relationship you have with the individual or company. This date of the payment is relevant because the trustee can only demand reimbursement of funds paid within the 90 days prior to the debtor filing bankruptcy. So, payments made two months ago may need to be given to the court, but money paid four months prior is legally yours to keep.
How much was paid also determines whether the trustee can collect or not. The trigger limit is $600 from individuals and $6,825 from businesses. Thus, you may be saved the headache of having to cut a check to the bankruptcy court if the amount your client paid was less than these minimum limits.
Lastly, payments made within the ordinary course of business may be exempt from confiscation. For example, if your client consistently paid their bill within 30 days of receiving an invoice, then the trustee may let you keep the funds because they were given as part of your normal relationship with the debtor and is not some attempt on the debtor's part to give preferential treatment to certain creditors.
2. Put Together Your Defense
The next step is to pull together all the documentation and evidence needed to support your case. This can be invoices, bank statements, account records, and contracts. Preferably, the information that proves your defense will be clearly visible (e.g. dates, payment amounts), but it's possible to demonstrate the same point using circumstantial evidence, provided there's enough of it. It's advisable that you consult with a bankruptcy attorney as soon as you possibly can. The lawyer will help you pull together an effective defense and navigate around any potential pitfalls that could derail your claim.
For more advice or help dealing with a clawback demand letter, contact a local bankruptcy lawyer.