Joe is the president and sole owner of a corporation. He invested a lot of money into the company. His accountant told him that he’d get better tax treatment and pay a lot less taxes if he considered the money a loan to the company and took his “compensation” in the form of loan repayments rather than as salary. Good tax advice; terrible bankruptcy advice.
If the company files bankruptcy, payments made to creditors on account of pre-existing debts made outside the ordinary course of the debtor’s business, within a certain period prior to bankruptcy can be recovered as “preferences” under bankruptcy law. For general creditors, the payments had to have been made within 90 days of the filing. However, for insiders (officers, directors, relatives, etc.), the lookback period is one year. Any payments Joe received in the year before the bankruptcy filing can be recovered by the Trustee as preferential payments.
But, Joe says, the payments were made in the ordinary course of the Debtor’s business! Alas, unless Joe is in the business of lending money, that argument won’t fly. It has to be in the ordinary course of both the creditor and the debtor’s business.
If Joe talks to an attorney soon enough, where the company can hold on for a bit longer, Joe can change the way he gets paid, and put himself back on a salary for a year (or as much of the year as the company can stay in business). Yes, Joe will have to pay income taxes, but he will get to keep the rest of his salary.