Ordinary Course of Business Defense in Preference Claims: Tests and Evidence

The ordinary course of business defense protects payments you received from a customer that later filed bankruptcy, as long as the payments fit the normal pattern of your dealings with that customer or the normal practice of your industry. It lives in Section 547(c)(2) of the Bankruptcy Code, and since Congress amended the statute in 2005, you only have to satisfy one of those two tests, not both.¹ That single change in the law is why many preference demands that look threatening on paper fall apart once a creditor puts the evidence together.

How the Defense Is Structured

Section 547(c)(2) has two parts. First, the underlying debt has to have been incurred in the normal commercial relationship between you and the debtor. A one-off, unusual transaction will not qualify. Second, the payment itself has to pass one of two separate tests:

a subjective test, measured against your actual payment history with this debtor, or
an objective test, measured against what is standard in your industry.

Before 2005, creditors had to clear both. The statute now reads “or,” and that word is doing almost all the work in modern preference defense. If your history with the debtor looks messy but your terms are standard for the industry, lean on the objective test. If the industry is all over the map but you and this debtor had a steady rhythm for years, lean on the subjective test. You pick the stronger prong.

The Subjective Test: Your History With the Debtor

The subjective test compares how payments flowed during the 90-day preference window to how they flowed during a baseline period when the debtor was presumably healthy. Courts want to see that the pattern did not meaningfully change as bankruptcy approached.

The baseline is usually the 12 months before the preference window, though some practitioners stretch it to 18 or 21 months and deliberately drop the three to six months immediately before the preference period. The reason is practical: a debtor’s payment behavior often deteriorates as trouble sets in, and including those months can skew the baseline so the preference-period payments look more ordinary than they really were. The cleanest baselines come from a period when the debtor was clearly still solvent.²

The main number is days-to-pay: how long it took the debtor to pay each invoice, often tracked as days sales outstanding. If the debtor historically paid in 30 to 45 days and the preference-period payments arrived at 38 days, you are in strong territory. If the debtor historically paid in 30 to 45 days but suddenly cleared a large invoice in 12 days during the preference window, that acceleration will stand out.

Method of payment matters too. A debtor that always paid by check but suddenly started wiring funds or sending overnight payments may have been prioritizing you over other creditors, and the trustee will say so. Your own conduct is on the table as well. If you ramped up collection pressure during the preference period with threatening letters, escalations to senior management, or threats to cut off supply, that behavior undermines your claim that the payments were business as usual. Consistency in both timing and conduct is what this test rewards.

The Objective Test: Industry Norms

The objective test shifts the lens away from your particular relationship and onto broader market practice. A payment is protected if it was made on terms that are normal for your industry, even if it departed somewhat from your specific history with this debtor. The test exists as a safety net for creditors whose relationship with the debtor is short, irregular, or poorly documented.

Proving it typically involves industry data or expert testimony showing the range of payment terms that companies in your sector consider acceptable. If invoices in your industry routinely get paid anywhere from 30 to 75 days, a payment at 60 days falls comfortably within that range regardless of what your specific invoices with this debtor looked like historically. Courts give creditors meaningful latitude here. The question is not whether the terms matched the industry average but whether they fell within the outer bounds of what is standard.

The objective test is especially valuable when you are a new vendor with only a few months of history with the debtor, or when the debtor’s payments were erratic from the start of the relationship. In those situations, building a reliable subjective baseline is difficult, and the objective standard offers a cleaner path.

What Evidence You Need

The burden is entirely yours. You have to show by a preponderance of the evidence that the payments were ordinary, which means more likely than not. The trustee does not have to disprove the defense; you build it from your own records.

Start with a complete payment history going back at least 12 months before the preference period, and ideally 18 to 24 months. For every invoice, document the date you issued it, the date the debtor received it where you can establish that, and the exact date payment arrived. Bank statements, deposit records, and electronic payment confirmations are the best evidence for pinning down receipt dates. Calculate days-to-pay for each invoice across the baseline and the preference window, then compare the averages and the ranges.

Preserve records that show the method of payment stayed consistent. If the debtor always paid by ACH and continued doing so during the preference window, that supports you. Gather routine correspondence as well: billing emails, shipping confirmations, and any communication about late payments. What you are trying to show is a complete absence of unusual pressure. If you never sent a formal demand letter during the baseline but sent three during the preference window, expect the trustee to point that out.

For the objective prong, you may need industry data or an expert analysis showing your payment terms fall within the normal range for your sector. Trade association publications, industry surveys, and testimony from experienced professionals in your field can all serve that purpose.

Make Sure It’s Actually a Preference First

Before you spend time on an affirmative defense, test whether the payment is a preference at all. The trustee has to prove five elements:

The debtor transferred money or property to you, or for your benefit.
The transfer covered a pre-existing debt rather than a simultaneous exchange.
The debtor was insolvent at the time. The law presumes insolvency during the 90 days before filing.
The transfer landed within 90 days before the bankruptcy filing, or within one year if you qualify as an insider.
The payment gave you more than you would have received in a Chapter 7 liquidation.

If any one of those fails, the trustee’s claim collapses before you ever reach Section 547(c)(2).¹ The fifth element is the one creditors most often overlook. In cases where unsecured creditors are expected to recover nothing in liquidation, almost any payment satisfies it. In cases with meaningful distributions, the math can work in your favor without any affirmative defense at all.

Other Defenses That Can Stack With It

Section 547(c) contains several other exceptions, and the Bankruptcy Code lets you combine them where the facts support it. You might protect part of a payment as ordinary course and offset the rest with new value you extended afterward.

Contemporaneous exchange. If you and the debtor intended the transaction as a simultaneous swap of payment for goods or services, and it was in fact substantially simultaneous, the payment is protected. A COD delivery where the debtor hands over a check when the shipment arrives is the classic example, and courts generally treat a short check-clearing delay as contemporaneous enough.³
Subsequent new value. If you got paid during the preference window and then kept shipping goods or providing services to the debtor on credit afterward, the value you extended after the payment can offset the preference amount. The offset only works if the new value was unsecured and you were not later paid for it through another unavoidable transfer.³
Small-preference threshold. If the total transferred is less than $8,575 (the adjusted figure effective April 1, 2025) and the debtor’s debts were not primarily consumer debts, the trustee cannot avoid the transfer at all. The threshold is adjusted periodically and tends to creep upward every few years.¹

If the demand sits close to that small-preference figure, raising the threshold in your first response letter can end the matter without legal fees.

Responding to the Demand or Lawsuit

Most preference claims start with a demand letter from the trustee or the trustee’s law firm, not a lawsuit. The letter identifies the payments the trustee considers preferential and asks you to return the money voluntarily, often at a modest discount. Do not pay on the spot. These opening offers are usually aggressive starting positions, and many preference demands settle for a fraction of the face amount or get defeated entirely once the creditor presents a solid affirmative defense.

Your first response should set out the factual basis for the defense. Attach or reference the payment history analysis, identify which prong you are relying on, and flag any other applicable defenses such as subsequent new value or the small-preference threshold. A well-documented response at this stage can resolve the matter without litigation.

If the trustee files a formal lawsuit, called an adversary proceeding, the clock starts running on your deadline to respond. Under the Federal Rules of Bankruptcy Procedure, you must file your answer within 30 days after the summons is issued unless the court sets a different deadline.⁴ Missing that deadline can produce a default judgment for the full amount the trustee demanded, which is one of the most avoidable and expensive mistakes in this area of law.

1
Office of the Law Revision Counsel. 11 USC 547 – Preferences
2
American Bankruptcy Institute. Prosecuting Preference Actions Post-BAPCPA Another View Toward a Reliable Statistical Model
3
Office of the Law Revision Counsel. 11 US Code 547 – Preferences
4
Office of the Law Revision Counsel. 11 USC App, Federal Rules of Bankruptcy Procedure, Part VII – Adversary Proceedings