Bankruptcy preference actions are lawsuits or demands brought by a bankruptcy trustee to recover payments a debtor made to certain creditors shortly before filing, so the money can be redistributed more evenly among everyone the debtor owed. For most creditors, the trustee can reach back 90 days from the filing date. For insiders, the reach extends to a full year. Receiving a demand doesn’t mean you have to pay it, and several defenses built into the statute exist for exactly this situation.
What Makes a Payment a Preference
A trustee cannot claw back just any pre-bankruptcy payment. Under 11 U.S.C. 547, five things all have to be true:1Office of the Law Revision Counsel. 11 USC 547 Preferences
- There was a transfer of the debtor’s property. The Code defines “transfer” very broadly, covering cash, liens, retained title as security, and even involuntary transfers like foreclosure.2Office of the Law Revision Counsel. 11 USC 101 Definitions
- The payment was on a debt the debtor already owed (an antecedent debt). Paying for something at the moment you receive it isn’t a preference; paying last month’s invoice can be.
- The debtor was insolvent when the payment was made. The statute presumes insolvency during the 90 days before filing, which puts the burden on the creditor to prove otherwise, usually with financial statements or expert analysis.
- The transfer happened inside the lookback window (90 days, or one year for insiders).
- The creditor came out better than it would have in a Chapter 7 liquidation. Since unsecured creditors typically get pennies on the dollar in liquidation, this element is easy for the trustee to meet.
If any one of the five is missing, the preference claim fails.
The 90-Day and One-Year Lookback Periods
The lookback period sets the outer boundary of what the trustee can even challenge. Ninety days for ordinary creditors, one year for insiders.1Office of the Law Revision Counsel. 11 USC 547 Preferences Counting follows the Federal Rules of Bankruptcy Procedure: the filing date is excluded, every calendar day after that counts including weekends and holidays, and if the last day lands on a weekend or legal holiday, the window extends to the next business day.3Legal Information Institute (Cornell Law School). Rule 9006 Computing and Extending Time
The date a transfer actually occurred can be its own fight. For checks, the Supreme Court held in Barnhill v. Johnson that the transfer happens when the bank honors the check, not when the debtor writes it.4Justia. Barnhill v Johnson For secured transactions, the date depends on when the security interest was perfected. Perfection within 30 days of the parties’ deal relates back to the earlier date; perfection later than 30 days pushes the transfer date forward, which can drag an old deal into the preference window.
Falling inside the window doesn’t automatically mean the payment is avoidable. The trustee still has to prove every other element, and you can still raise defenses. But a payment made outside the window ends the analysis before it starts.
Who Counts as an Insider
The one-year window for insiders exists because people close to a failing business tend to know it’s failing before outsiders do, and they can arrange to get themselves paid first. For a corporate debtor, “insider” includes directors, officers, and anyone in control of the company. For an individual debtor, it includes relatives and entities the debtor controls. Partnerships involving the debtor as a general partner also qualify.2Office of the Law Revision Counsel. 11 USC 101 Definitions
The list isn’t exhaustive. Courts can treat someone as a non-statutory insider when the relationship is close enough to justify the same scrutiny. The Butler v. David Shaw, Inc. test asks whether the creditor had enough authority to “unqualifiably dictate corporate policy and the disposition of corporate assets.”5Justia. Butler v David Shaw Inc, 72 F3d 437 Personal familiarity between the parties isn’t enough on its own.
Defenses That Reduce or Eliminate the Claim
The Code gives creditors several affirmative defenses, and the trustee is required to exercise reasonable due diligence and consider a creditor’s known defenses before filing.1Office of the Law Revision Counsel. 11 USC 547 Preferences Proving them, though, is on you.
Ordinary Course of Business
The most frequently used defense. It protects payments that look like routine business, not last-minute grabs. The payment has to be on a debt incurred in the ordinary course of both parties’ business, and you then have to show either that the payment matched how you and the debtor historically did business (the subjective test) or that the terms were in line with industry norms (the objective test). Only one prong needs to hold. Courts look at payment timing, whether invoices were paid on the usual schedule, and whether you tightened collection pressure as things got worse. The Supreme Court’s decision in Union Bank v. Wolas confirmed that even long-term debt payments can qualify.6Justia. Union Bank v Wolas
Contemporaneous Exchange for New Value
If both sides intended the payment and the goods or services to change hands at the same time, and it actually happened that way, the transaction isn’t a preference. A COD delivery is the standard example. The defense weakens as the gap between delivery and payment stretches out.
Subsequent New Value
If you received a preferential payment and then extended more credit to the debtor after the fact, the new credit offsets your exposure dollar for dollar. Ship $50,000 worth of goods on credit after receiving $50,000, and the preference washes out. The new value has to be unsecured and cannot itself have been repaid by another avoidable transfer.
Purchase Money Security Interest
A lender who financed the debtor’s purchase of specific property, and perfected its security interest in that property within 30 days after the debtor received it, is protected. This one is heavily used by equipment and asset financiers.
Small Transfer Safe Harbor
For business debtors (cases not primarily involving consumer debts), the trustee can’t avoid transfers totaling less than $8,575 as of April 1, 2025.7Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases For individuals whose debts are primarily consumer debts, the floor is $600. These figures adjust every three years for inflation. Vendors with modest exposure to a business debtor sometimes find the entire claim ends here.
How Long the Trustee Has to Bring the Claim
Preference actions have a deadline. Under 11 U.S.C. 546(a), the trustee has to sue within two years after the order for relief (usually the filing date) or before the case closes or is dismissed, whichever comes first. If a trustee is appointed after the filing, the deadline extends to one year after that appointment, but only if it happens inside the two-year period.8Office of the Law Revision Counsel. 11 USC 546 Limitations on Avoiding Powers
If a demand letter shows up late, the trustee may be pressed against this deadline, which can shift settlement leverage. If the deadline has already passed, the claim is time-barred no matter how strong it looked on paper.
What a Preference Action Actually Looks Like
Most preference actions begin with a demand letter, not a lawsuit. The letter identifies the payments the trustee considers preferential, demands repayment, and usually offers a discount for a quick settlement. These letters often arrive months (sometimes more than a year) after the bankruptcy filing, and they can catch creditors completely off guard.
If you don’t respond or can’t settle, the trustee has to file an adversary proceeding in bankruptcy court to actually pursue the money. That’s a lawsuit inside the bankruptcy case, with a complaint, answer, discovery, and possibly a trial. You have the right to raise defenses, take discovery, and test the trustee’s evidence.
What to Do if You Received a Preference Demand
Ignoring a demand letter is the worst move. It raises the odds the trustee files a formal adversary proceeding, and once that happens your leverage drops and your costs rise.
- Pull your records right away. Gather every invoice, purchase order, delivery confirmation, and payment record with the debtor. Cover the 90-day preference period and at least a year or two before it, because the ordinary course defense turns on comparing the preference-period payments to your historical pattern.
- Assess your defenses before you write back. Did the payments track your usual billing cycle? Did you ship more goods or provide more services after receiving the money? Was any transaction a simultaneous exchange? Your defenses set your negotiating floor.
- Don’t pay the opening number. Initial demands usually offer only a 5 to 15 percent discount for prompt payment. Creditors with documented defenses regularly settle for a fraction of what was demanded.
- Talk to a bankruptcy attorney. Preference defense is technical, and counsel almost always costs less than overpaying a settlement or trying to litigate on your own.
What You Keep if You Have to Return the Money
Returning a preferential payment doesn’t leave you with nothing. Under 11 U.S.C. 502(h), a creditor who gives back a payment gets to file a claim against the estate for the same amount, treated as if the debt existed before the filing date.9Office of the Law Revision Counsel. 11 USC 502 Allowance of Claims or Interests In practice, you trade cash for an unsecured claim that pays whatever dividend that class ultimately receives. For unsecured creditors, that dividend is often small. For secured creditors, the 502(h) claim may retain secured status, which in some cases makes the whole exercise close to a wash.