Meaning
Time period used to identify preferential transfers in insolvency proceedings governs payments made by a debtor shortly before a bankruptcy filing. Under the ninety-day rule, a trustee has the authority to recover payments made to creditors to ensure that all claimants are treated fairly. This window prevents a struggling company from paying off favored suppliers while leaving others with nothing.
It applies to transfers of cash or property that occurred within that specific span.
Window Duration
Calculation of this period starts from the date the bankruptcy petition is filed and moves backward. Any payment made inside the ninety-day rule is subject to scrutiny and potential clawback. This creates a risk for suppliers who receive large payments from distressed customers.
Ordinary Business
Exceptions exist for payments made in the normal course of trade or according to standard financial terms. A creditor can defend against the ninety-day rule if they show that the payment was not an unusual event. This protection allows commerce to continue even when a company is in financial trouble.
Preference Risk
Credit managers monitor the health of their clients to avoid the impact of a lost payment. If a payment is seized under the ninety-day rule, the creditor becomes an unsecured claimant in the bankruptcy case. This often results in receiving only pennies on the dollar for the original debt.
To manage this, some firms require cash in advance or shorter payment terms when a buyer shows signs of weakness. Insolvency laws balance the rights of individual creditors with the needs of the collective group.
