A bankruptcy clawback is a process where businesses may be required to return payments received from a customer who later files for bankruptcy. Under Section 547 of the Bankruptcy Code, if a business received payment within 90 days before the customer's bankruptcy filing, those funds can be demanded back by the debtor or trustee. This measure is intended to ensure equal treatment among creditors and prevent preferential payments.
Clawbacks can pose financial challenges for small businesses, especially when funds have already been used. To reduce exposure to these risks, experts recommend several strategies: monitoring customers’ financial health, maintaining consistent business practices, avoiding aggressive debt collection tactics, shifting risk through tools like letters of credit from banks, and keeping thorough documentation of all transactions and communications.
If a business receives a demand letter regarding a potential clawback, it should not ignore it but also not rush to pay immediately. Reviewing details such as the timing of payments and whether goods or services were provided after payment is important. Legal defenses may apply if payments followed ordinary patterns or if transactions were conducted on delivery terms. In many cases, settlements are reached for less than the original demand.
Should negotiations fail and legal proceedings begin in bankruptcy court, consulting an experienced attorney is advised. The practice of clawbacks remains part of federal law aimed at creditor fairness.
Business owners seeking more information about bankruptcy clawbacks can contact the NFIB Legal Center at (800) 552-NFIB or info@nfib.org.
