What Is a Preference Claim? Why the Trustee Wants Your Money Back

A bankruptcy preference claim is a demand, made by a trustee or debtor in possession, for the return of payments a creditor received during the 90 days before the bankruptcy filing, or one year for insiders. The theory is fairness: a debtor sliding into bankruptcy should not be able to prefer some creditors over others, so payments made in that window on old debt can be clawed back and redistributed. The law is real, the letters are jarring, and most recipients’ first reaction, that they cannot possibly have to give back money they were lawfully owed, is understandable and wrong.

The good news sits in the defenses. Preference exposure is one of the most defensible claims in commercial law, and the settlements I negotiate for creditor clients at AEGIS Law routinely resolve for a fraction of the demand. The difference is made by records and by understanding how the statute actually works.

What must the trustee prove to establish a bankruptcy preference claim?

Under Section 547 of the Bankruptcy Code, the elements are mechanical. A transfer of the debtor’s property, to or for the benefit of a creditor, on account of an antecedent debt, made while the debtor was insolvent, within 90 days before the petition (one year for insiders), that enabled the creditor to receive more than it would have in a Chapter 7 liquidation. Insolvency during the 90 days is presumed, and in most cases where unsecured creditors are not being paid in full, the greater-recovery element is satisfied almost automatically.

Notice what is absent from that list: any wrongdoing by the creditor. You did nothing improper by getting paid. Preference liability is no-fault by design, which is why the fight almost never happens on the elements. It happens on the affirmative defenses, where the burden is yours and the records decide.

What is the ordinary course of business defense?

The most commonly litigated defense protects payments made in the ordinary course of business between the parties. The core question is whether the payments during the preference period look like the payments before it. Courts compare timing above all: if the historical average payment ran 42 days from invoice and the preference period payments ran 40 to 48 days, the defense is strong. If the debtor suddenly paid in 15 days, or after 95, or only after threats, the pattern broke and the defense weakens.

This is where my data background does visible work. A preference defense is fundamentally a statistical argument about payment behavior, and presenting the invoice-by-invoice history cleanly, with the baseline period and the preference period side by side, resolves cases. Creditors who changed their collection behavior in the danger window, by demanding faster payment, adding pressure, or altering terms, will find those choices reflected in the data. That is worth remembering before the bankruptcy, not just after: aggressive collection from a failing customer can convert into a bankruptcy preference claim later.

There is a second branch of the defense worth knowing: payments made according to ordinary business terms, meaning the norms of the relevant industry rather than the specific relationship. Where the parties’ own history is short or messy, industry payment norms, established through data and sometimes expert testimony, can carry the defense instead. Between the two branches, a creditor rarely needs a perfect payment history. It needs a payment history that a judge can look at and see commerce rather than a race against the petition date.

What other defenses reduce or eliminate exposure?

The subsequent new value defense is often the workhorse. If, after receiving a payment, you shipped additional goods or provided additional services on credit, that new value offsets the preference dollar for dollar. Vendors who kept supplying a struggling customer frequently find their exposure shrinks dramatically once new value is properly calculated. The calculation has traps around timing and paid-versus-unpaid new value, and doing it correctly is exactly the kind of detail that moves settlement numbers.

Contemporaneous exchanges, such as true COD transactions, are not preferences at all, because they are not payments on antecedent debt. Statutory floors protect small transfers, and in smaller cases venue protections limit where suits can be brought. There is also a due diligence requirement: trustees must take into account a party’s known defenses before filing suit. In practice, a prompt, well-documented defense presentation before litigation begins is the cheapest resolution path available, and it is the standard playbook I run for creditor clients.

How should you respond to a preference demand letter?

Do not pay the demand, and do not ignore it. The demand number is an opening position, typically calculated as the gross transfers in the window with no defenses applied. Ignoring it invites a lawsuit in the bankruptcy court, often in a distant venue, where defense costs start doing the trustee’s negotiating for him.

Instead, assemble the account history: every invoice, every payment, dates, terms, and any communications about payment timing. Have counsel build the defense analysis, ordinary course statistics and the new value ledger, and present it. Most bankruptcy preference claims settle without litigation once the trustee sees a documented defense, because trustees are economic actors pursuing net recovery across hundreds of claims. Make your file the one that is expensive to pursue and easy to settle low. And going forward, treat this as a design constraint of selling to distressed customers: consistent terms, consistent timing, and complete records are not just good hygiene. They are your future preference defense, built in advance.

Check your insurance and your contracts before assuming the exposure is entirely yours. Some trade credit insurance policies respond to preference liability, some purchase agreements and factoring arrangements allocate it, and where goods moved through intermediaries the correct defendant may be genuinely disputable. And calendar the statute of limitations arithmetic on your side as well: a demand letter sent near the end of the trustee’s two-year window has leverage problems of its own, since the trustee must sue soon or lose the claim, and defendants who know that negotiate differently in the final months.

Frequently asked questions

How long after a bankruptcy filing can preference claims be brought?

Generally two years from the petition date, sometimes slightly longer depending on trustee appointment timing. Demand letters commonly arrive in the second year, long after most creditors have mentally closed the file.

I had a contract requiring the payments. Does that defeat a preference claim?

Not by itself. A contractual right to payment does not remove a transfer from the statute. The contract terms matter as evidence for the ordinary course defense, but they are not a standalone shield.

Can I just refuse to respond and make the trustee prove it?

You can, and the trustee will usually sue, because the prima facie elements are easy to establish. The leverage is in the defenses, and defenses persuade earliest and cheapest when presented before litigation hardens positions.

Talk with Eric

If a preference demand has arrived, the account records you already have are probably worth more than you think. I defend and settle preference claims as Chair of the Bankruptcy and Restructuring Practice Group at AEGIS Law. Reach me at elangston@aegislaw.com.

By Eric Langston, Chair, Bankruptcy & Restructuring Practice Group, AEGIS Law