11 USC 547 Preferences: Elements, Defenses, and Deadlines

Bankruptcy preference actions are lawsuits or demands brought by a bankruptcy trustee to recover payments a debtor made to creditors shortly before filing for bankruptcy. The idea is to unwind last-minute payments that put one creditor ahead of the rest, so the money can be shared more evenly across everyone the debtor owed. If you received a payment from a customer that later filed bankruptcy and now a trustee is asking for it back, this is what’s happening — and it’s not automatic. The trustee has to prove specific elements, and you have real defenses.

What the Trustee Has to Prove

A trustee cannot claw back just any pre-bankruptcy payment. Five elements have to line up. Miss one and the claim fails.¹

First, there has to be a transfer of the debtor’s property. The Bankruptcy Code reads “transfer” broadly to cover any way of parting with property or an interest in it, whether voluntary or not, including cash payments, liens, and retention of title as security.² For check payments, the Supreme Court held in Barnhill v. Johnson that the transfer happens when the bank honors the check, not when the debtor writes it, which can shift a payment into or out of the preference window by a few days.³

Second, the payment has to be on an antecedent debt — money the debtor already owed at the time. A payment made at the moment goods are received is a current exchange, not a preference. An invoice from last month paid this month is antecedent.

Third, the debtor has to have been insolvent when the payment was made, meaning total debts exceeded the fair value of all assets.² The statute presumes insolvency for the 90 days before filing, which shifts the burden to the creditor to prove otherwise.¹ Rebutting the presumption usually takes balance sheets and sometimes expert testimony, and it’s an uphill fight.

Fourth, the payment must have fallen within the lookback period — 90 days before filing for ordinary creditors, one year for insiders.¹

Fifth, the payment must have left the creditor better off than it would have been in a Chapter 7 liquidation. In most Chapter 7 cases, unsecured creditors get pennies on the dollar, so any meaningful payment during the preference period usually satisfies this element. Fully secured creditors have a stronger argument, because collateral would have paid them anyway.

The 90-Day and One-Year Windows

The lookback period draws the outer boundary. Nothing outside it can be challenged. For most creditors, the window is 90 days back from the filing date. For insiders, it’s a full year.¹

Counting the 90 days follows the Federal Rules of Bankruptcy Procedure. The filing date is excluded, and every calendar day after that counts, weekends and holidays included. If the final day of the window lands on a Saturday, Sunday, or legal holiday, it rolls to the next business day.⁴

A payment inside the window is not automatically avoidable; the trustee still has to prove the other elements. But a payment outside the window is safe, full stop.

Who Counts as an Insider

The one-year window for insiders exists because people close to a failing business know it’s failing sooner than anyone else and can arrange to get paid first. For a corporate debtor, insiders include directors, officers, and anyone in control. For an individual, the list covers relatives and entities the debtor controls. General partners and partnerships in which the debtor is a general partner qualify too.²

The statutory list isn’t the end of the analysis. Courts can treat someone as a non-statutory insider when the relationship is close enough. In Butler v. David Shaw, Inc., the Fourth Circuit asked whether the creditor exercised enough authority to “unqualifiably dictate corporate policy and the disposition of corporate assets.”⁵ Familiarity alone doesn’t cut it. In Anstine v. Carl Zeiss Meditec AG, a 10% shareholder that dealt with the debtor at arm’s length was not an insider, and the Tenth Circuit agreed that personal interaction by itself doesn’t create insider status.

Defenses That Cut or Eliminate Liability

A preference demand is not a verdict. The Code gives creditors several affirmative defenses, and the trustee is required to exercise reasonable due diligence and consider known defenses before suing.¹ The catch: the burden of proving a defense is on the creditor.

Ordinary Course of Business

This is the most common defense. It protects payments that look like routine business, not last-minute grabs. The debt has to have been incurred in the ordinary course of both parties’ businesses, and the creditor must show either that the payment matched the way the two sides historically dealt with each other (the subjective test) or that the terms were consistent with industry norms (the objective test).¹ Only one prong has to hit. Courts look at whether payment timing was steady, whether invoices were paid on the same rough schedule as before, and whether the creditor turned up the collection pressure as the debtor sank. The Supreme Court confirmed in Union Bank v. Wolas that this defense can reach payments on long-term debt as well.⁶

Contemporaneous Exchange for New Value

If both sides intended a payment to be a simultaneous swap for goods or services, and that’s essentially what happened, the transfer is protected.¹ COD delivery is the classic example. The wider the gap between delivery and payment, the weaker the defense gets.

Subsequent New Value

If you received a preferential payment and then shipped additional goods or extended more credit afterward, that new value offsets the preference dollar for dollar. A $50,000 payment followed by another $50,000 shipment on credit can wipe out the exposure. The new value has to be unsecured and cannot itself have been repaid by another avoidable transfer.¹ In Mosier v. Ever-Fresh Food Co., the Ninth Circuit allowed a supplier to offset its liability by the full value of goods shipped after the preferential payment.

Purchase Money Security Interest

A lender who financed the debtor’s purchase of specific property and took a security interest in that property is protected if the interest was perfected within 30 days after the debtor received the property. Equipment lenders and asset financiers most often rely on this defense.¹

Small-Dollar Safe Harbors

Not every payment is worth chasing. If the debtor’s debts are not primarily consumer debts, the trustee cannot avoid a transfer with a total value under $8,575 (effective April 1, 2025).⁷ For individual debtors whose debts are primarily consumer debts, the threshold is $600.¹ Both figures adjust every three years with the Consumer Price Index. A vendor who received a few thousand dollars from a business debtor may be fully covered.

The Trustee’s Deadline

Preference actions have a shelf life. Under 11 U.S.C. 546(a), the trustee must sue before whichever comes first: two years after the order for relief (in most cases the filing date), or the date the case is closed or dismissed. If a trustee is appointed or elected after the filing, the deadline can extend to one year after that appointment, but only if the appointment happens before the two-year period runs out.⁸ If you get a demand late in the process, the trustee’s own clock can affect settlement leverage. A time-barred claim fails regardless of the underlying facts.

How the Process Actually Unfolds

Most preference actions start with a demand letter, not a lawsuit. The letter identifies the payments the trustee views as preferential, asks for the full amount back, and typically offers a discount for prompt settlement. These letters often show up months or more than a year after the bankruptcy filing.

If the creditor doesn’t respond or a deal can’t be reached, the trustee files an adversary proceeding in bankruptcy court. That’s a lawsuit inside the bankruptcy case, with a complaint, an answer, discovery, and potentially a trial. The creditor can raise defenses, take discovery, and challenge the trustee’s evidence.

Once a transfer is avoided, the money flows back into the bankruptcy estate and gets distributed to creditors under the Code’s priority rules.

What to Do When a Demand Letter Arrives

The worst move is silence. Ignoring the letter raises the odds of a formal adversary proceeding, and once that starts your leverage drops and your legal costs rise.

Pull your records right away. Gather every invoice, delivery confirmation, purchase order, and payment record for the debtor. Get the 90-day window covered, and ideally the one to two years before it, because the ordinary-course defense turns on comparing preference-period payments against your historical pattern.
Work through your defenses before you respond. Did payment timing match your usual billing cycle? Did you ship more goods after receiving the payment? Was any transaction a simultaneous exchange? Your defenses set your negotiating floor.
Don’t just pay the demand. Trustees often ask for the full amount or offer only a modest 5 to 15 percent discount for quick payment. Creditors with documented defenses regularly settle for far less.
Talk to a bankruptcy attorney. The analysis is technical, and experienced counsel usually costs less than overpaying a settlement or handling litigation alone.

What You Get If You Have to Pay

Returning a preferential payment doesn’t leave you empty-handed. Under 11 U.S.C. 502(h), a creditor who surrenders a payment gets to file a claim against the estate for that amount, treated as if the debt existed before the filing date.⁹ You trade cash for an unsecured claim, which pays whatever dividend the estate distributes to that class. For unsecured creditors, that dividend is usually modest. If the original payment was tied to collateral, the 502(h) claim can keep secured status, and in some cases the whole avoidance ends up close to a wash.

1
Office of the Law Revision Counsel. 11 USC 547 Preferences
2
Office of the Law Revision Counsel. 11 USC 101 Definitions
3
Justia. Barnhill v Johnson
4
Legal Information Institute (Cornell Law School). Rule 9006 Computing and Extending Time
5
Justia. Butler v David Shaw Inc, 72 F3d 437
6
Justia. Union Bank v Wolas
7
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
8
Office of the Law Revision Counsel. 11 USC 546 Limitations on Avoiding Powers
9
Office of the Law Revision Counsel. 11 USC 502 Allowance of Claims or Interests