A voidable preference is a payment a debtor made to a creditor in the days or months before filing for bankruptcy that gave that creditor more than it would have received in a Chapter 7 liquidation. The bankruptcy trustee can recover, or “claw back,” those payments and redistribute the money to all creditors on equal footing. The rules live in 11 U.S.C. § 547, and they reach any business that took payment from a company that later filed.1 If you have received a demand letter, the money is not automatically gone: the trustee has to prove five things, and you have several defenses that often shrink or eliminate the claim.
What Makes a Payment a Voidable Preference
A trustee cannot recover every check a debtor wrote before bankruptcy. Under Section 547(b), the trustee must prove all five of these elements. Miss one, and the payment stands.
- The transfer was of the debtor’s own property to or for the benefit of a creditor. Payments funded by a third party, such as a guarantor using its own money, do not count.
- The payment was on a debt that already existed. Cash-on-delivery transactions fail this element because no old invoice is being retired.
- The debtor was insolvent at the time, meaning liabilities exceeded the fair value of assets. The Code presumes insolvency during the 90 days before filing, so the burden is on you to show the debtor was actually solvent on the date of your payment, which usually requires a balance-sheet analysis.
- The payment fell inside the look-back window (see below).
- The creditor got more than it would have received in a Chapter 7 liquidation. For unsecured creditors this is almost always true, because unsecured claims typically recover pennies on the dollar. A fully secured creditor paid within the value of its collateral generally does not have preference exposure.
The 90-Day and One-Year Look-Back Periods
For ordinary trade creditors, the reachable window is the 90 days before the petition date. For insiders, it stretches to a full year. The Code defines insider broadly: for a corporate debtor, that includes directors, officers, anyone who controls the company, and their relatives; for an individual debtor, it includes relatives, partnerships in which the debtor is a general partner, and corporations where the debtor is a director or officer. The longer reach exists because insiders can see trouble coming before outside creditors do.
Defenses That Keep the Money
Even when the trustee proves all five elements, several statutory defenses can protect the payment. The creditor carries the burden on these, so documentation is what wins them.
Ordinary Course of Business
This is the most common defense, and it protects payments made consistently with how you and the debtor normally did business. The statute gives two alternative tests, and you only need to win one.
The first looks at the specific history between you and the debtor. If invoices were historically paid around day 25 and the challenged payment landed on day 27, it fits the pattern. Courts compare timing, amounts, and payment methods against the prior course of dealing.
The second looks at industry norms. Even a payment that deviated from your own history can be protected if it lined up with how businesses in the relevant industry generally pay. This one usually requires expert testimony about standard terms in the sector.
Contemporaneous Exchange for New Value
If both sides intended the payment to be a roughly simultaneous swap for new value, and the exchange in fact happened close in time, the transfer is protected. A COD delivery, where the check changes hands as the goods do, is the textbook case.
Subsequent New Value
This one reduces the trustee’s recovery by the value of any unpaid goods, services, or credit you provided to the debtor after receiving the challenged payment. If you got $10,000 and then shipped $4,000 more on unpaid credit, your exposure drops to $6,000. Two conditions apply: the new value cannot be secured by an interest that would survive avoidance, and the debtor cannot have already made a non-avoidable payment for it. The defense rewards creditors who kept doing business with a struggling customer instead of cutting them off.
Small-Transfer Safe Harbor
Small preferences are not worth the cost of chasing, so the Code exempts them. For cases in which the debtor’s debts are not primarily consumer debts, the threshold is $8,575 as of April 1, 2025, and it adjusts every three years for inflation. For individual debtors with primarily consumer debts, a separate $600 threshold applies. Payments under the applicable floor are safe.
How Far Back the Trustee Can Reach, and Who They Can Chase
Section 546(a) gives the trustee a limited window to file. An avoidance action must be brought before the earlier of two dates: two years after the order for relief (usually the petition date), extended by up to a year if a new trustee is appointed inside that window; or the date the case is closed or dismissed. Most preference suits get filed inside the first two years. If a demand letter arrives close to that mark, the deadline pressure cuts both ways and improves your leverage.
Once a transfer is avoided, Section 550 lets the trustee recover the property or its value not only from the creditor who first received it, but also from anyone who received it downstream. Moving money through a subsidiary or affiliate does not shake the claim.
What to Do If You Receive a Preference Demand Letter
Ignoring the letter is the worst move. If you do nothing, the trustee will file an adversary proceeding for the full amount and you lose any chance to negotiate.
Paying the demanded amount is almost as bad. Initial letters typically ask for the entire preference or offer a token discount of 5 to 15 percent, but creditors with real defenses routinely settle for far less. Since 2019, Section 547(b) has required the trustee to exercise “reasonable due diligence in the circumstances of the case” and account for the creditor’s known or reasonably knowable affirmative defenses before filing. That amendment was aimed at “preference mills” that sent mass demands hoping recipients would just pay, and it gives you an additional line of attack if the trustee did no real investigation.
Start by pulling records. For an ordinary-course defense, you want invoices and payment histories covering both the 90-day preference window and a baseline of one to two years before it. For a contemporaneous exchange, you want delivery records showing that goods or services moved at about the same time as payment. For subsequent new value, you want documentation of any unpaid goods or services you provided after the challenged payment.
Then talk to a bankruptcy attorney before you respond. The strength of your paperwork often decides whether the case settles at ten cents on the dollar or ninety.