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Question: I received a bankruptcy preference demand letter for $1200 that was paid to our business for goods and services within the 90 day period prior to their petition date. This $1200 balance was not for a past debt but rather was a prepayment for a service they received 3 days later. From my understanding, the preference demand can only be for a transfer of funds for an existing debt, correct?
Response 1: Yes, but the Trustee has a way of turning any debt to an existing debt. So, what you think may be a contemporaneous exchange may be regarded by the Trustee as a preference payment especially since this was a prepayment for a debt that did not even exist at the time of the payment. See 11 U.S.C. Section 547(c)(1). However, if you lose the argument on the contemporaneous exchange, you can certainly rely on the safe harbor provision, which exempts any payment under $5,850.00 for non-consumer debt as a preference payment. See 11 U.S.C. Section 547(c)(9).
Furthermore, this balance is under the $5000 limit so do I even have to respond to this letter?
Response 2: Yes, you do have to respond. Not responding is not a good idea. If you do not respond, the Trustee would send you another demand letter and if you ignore that one, the Trustee would file a lawsuit against you. So, it is better to respond and tell the Trustee why his demand to turn over property would not be complied with.
Unfortunately, I do not have a "sample letter" to provide to you because response to preference demand is case specific. There is no form letter for it. The letter is structured to respond to specific demand by the Trustee. In this case, your argument would be that this was a contemporaneous exchange and thus exempt under 11 U.S.C. Section 547(c)(1) as preference payment. Also, it is exempt as preference payment because the amount involved is less than $5,850.00. See 11 U.S.C. Section 547(c)(9).
If I should respond, does someone have a sample letter I can use to send the trustee?
Response 3: Unfortunately, I do not have a sample letter for you, but see my previous responses and the link below on how to respond to preference demand letter from the Trustee: