Preferential Transfers in Bankruptcy: Elements, Defenses, and Deadlines

Preferential transfers in bankruptcy are payments or property transfers a debtor made to a creditor shortly before filing that a trustee can recover for the estate under 11 U.S.C. § 547. The point is not to punish the creditor. It is to stop a failing debtor from picking favorites among the people they owe and to redistribute what got paid out under the bankruptcy priority rules. If your company received a payment from a customer who later filed bankruptcy, you can be asked to write a check back to the estate months or even a year later.

The Five Elements the Trustee Must Prove

A preference claim only stands if the trustee establishes every one of five statutory elements. Missing one kills the claim.

Transfer of the debtor’s property. The debtor moved something of value to a creditor or for a creditor’s benefit. Cash, a lien, goods, any shift in property interests.
For an antecedent debt. The payment covered a debt the debtor already owed. A same-day cash-on-delivery purchase does not qualify because no earlier obligation existed.
While the debtor was insolvent. Total debts exceeded the fair value of all non-exempt assets at the moment of transfer.
Within the look-back period. The transfer happened during the 90 days before filing, or up to a year before if the creditor was an insider.
The creditor came out ahead. The creditor received more than it would have gotten in a hypothetical Chapter 7 liquidation.

That last element gives preference law its bite. If unsecured creditors in liquidation would only see eight cents on the dollar, any creditor paid in full during the preference window received a windfall compared to that baseline. The trustee can recover the whole transfer, not just the difference.¹

Look-Back Windows and the Insolvency Presumption

For ordinary arm’s-length creditors, banks, suppliers, service providers, the trustee can reach back 90 days before the petition date. Insiders face a full year of exposure. For corporate debtors, insiders include directors, officers, people who actually run the company, and their relatives.¹

Inside the 90-day window, the bankruptcy code presumes the debtor was insolvent. That presumption is rebuttable, but the burden shifts to the creditor, and proving a debtor was actually solvent at a specific moment is a document-heavy, expensive exercise. Insolvency uses a balance-sheet test: total debts must exceed the fair value of the debtor’s property, leaving out assets hidden or transferred to defraud creditors and property that would be exempt from the estate.²

The presumption does not stretch into the extended insider period. For transfers to insiders that fall between 90 days and one year before filing, the trustee has to prove insolvency independently.

Dollar Floors That Block Small Claims

Not every payment is worth pursuing, and the code builds in floors that can knock a claim out before any defense analysis is needed.

Consumer cases. If the debtor is an individual with primarily consumer debts, the trustee cannot avoid a transfer worth less than $600.¹
Business cases. As of the adjustment effective April 1, 2025, the trustee cannot avoid a transfer with aggregate value under $8,575.¹

Venue rules add another practical hurdle. Under 28 U.S.C. § 1409(b), the trustee has to sue in the creditor’s home district (rather than the bankruptcy court’s district) when the amount at issue falls below certain thresholds. As adjusted effective April 1, 2025:

Less than $1,725 for general money judgments or property.
Less than $25,700 for consumer debts.
Less than $31,425 for non-consumer debts against a non-insider.

That third figure is the one that matters most for business creditors.³ For claims under $31,425 against a non-insider, the trustee has to litigate on the creditor’s turf. The travel and expense often make pursuit uneconomical, and creditors gain real settlement leverage as a result.

Defenses That Defeat or Shrink the Claim

Section 547(c) gives creditors several affirmative defenses. Any one of them, applied to a transfer, defeats the trustee’s claim as to that amount. These exist because the code doesn’t want to punish normal commercial behavior or scare off creditors who kept working with a shaky customer.

Ordinary Course of Business

This is the defense creditors raise most often. It protects payments on debts incurred in the ordinary course of both parties’ business, so long as the payment itself was also made in the ordinary course. Since 2005, the creditor only needs to satisfy one of two alternative tests: the payment matched the historical pattern of dealings between these specific parties, or it was on terms standard in the industry.⁴

A supplier paid on net-30 terms within the same general window as always has a strong position. Creditors get into trouble when the pattern shifted. A debtor suddenly paying a 90-day-old invoice in full when they had historically paid at 30 days looks unusual, and unusual is the opposite of ordinary.

Contemporaneous Exchange for New Value

Where the debtor and creditor intended a simultaneous swap of value and it happened substantially at the same time in fact, the payment is safe. Cash on delivery is the standard example. The estate lost nothing because the debtor received equivalent value on the spot.¹

Subsequent New Value

This one rewards creditors who kept shipping. If you received a $5,000 payment during the preference period and then delivered $3,000 in new goods on credit that never got paid for, the $3,000 offsets the preference. The trustee can only recover $2,000. The new value cannot be secured by a lien the trustee is unable to avoid, and the debtor cannot have already repaid it in another transfer.¹

Purchase-Money Security Interests

When a lender extends credit specifically so the debtor can buy identified property, and that property secures the loan, the resulting lien is protected if the lender perfects within 30 days after the debtor takes possession. Ordinary asset-financing transactions stay outside the clawback zone as a result.¹

Floating Liens on Inventory and Receivables

Commercial lenders often hold security interests that float across a changing pool of inventory or accounts receivable. These are protected except to the extent the lender’s position actually improved during the look-back period. Compare two snapshots: how much the debt exceeded collateral value at the start of the 90-day window (or one year for insiders), and how much it exceeded collateral value on the petition date. Only the reduction in that gap is recoverable.¹

The Trustee’s Due Diligence Duty

Trustees cannot send demand letters without doing their homework. Since 2019, section 547 has required the trustee to conduct “reasonable due diligence in the circumstances of the case” before filing, taking into account the creditor’s “known or reasonably knowable affirmative defenses.”¹ Added by the Small Business Reorganization Act, this duty applies in all bankruptcy cases.

A trustee who fires off a boilerplate demand on a payment that plainly falls within the ordinary course defense has arguably failed that standard. Creditors who receive poorly investigated demands should push back explicitly on that point. The amendment was aimed at the mass-mailing model of preference practice, where small vendors were pressured to settle amounts too small to defend.

How to Respond to a Preference Demand

Silence is the worst response. Ignoring the letter does not make it go away. It only removes your chance to settle cheaply and pushes the matter toward litigation.

Start by pulling every record tied to the debtor’s account: invoices, purchase orders, delivery receipts, payment records, and any correspondence about payment terms. Build a timeline of every transaction, and look hard at the 90-day window before the petition date. Ordinary course of business is fact-intensive. You need the data to show either that the payment pattern during the preference period matched what these two parties had always done, or that the terms lined up with industry norms.

Evaluate new value next. Any goods or services you delivered on credit after the allegedly preferential payment that never got paid for reduce the exposure dollar for dollar. Then check the floors. A transfer below $8,575 in a business case is below the de minimis threshold entirely. A claim under $31,425 against a non-insider forces the trustee into your home district, which changes the economics.

Once you know the strength of your defenses, respond in writing to the trustee’s counsel with a documented explanation of why the claim should be dismissed or settled at a steep discount. Trustees make economic decisions like any other litigant. A well-supported defense letter often resolves the matter before any adversary proceeding is ever filed.

Deadlines and Who Can Be Chased

The trustee does not have unlimited time. A preference action must be filed before the earlier of two dates: two years after the order for relief (in most voluntary cases, the petition date), or the date the case closes or is dismissed. If a trustee is appointed after the case begins but before the two-year mark, the deadline extends to one year from that appointment.⁵ Once the window closes, the claim is dead.

Recovery reaches beyond the initial recipient. The trustee can pursue the property or its value from whoever first received it or from any later transferee who received it down the chain. There is a safe harbor: a later transferee who took in good faith, for value, and without knowledge that the original transfer was avoidable cannot be forced to give it back.⁶

Tax Treatment When You Have to Pay It Back

A creditor who returns a preference payment does not just lose the money. They also have to address the tax side, because that payment was probably reported as income in a prior year. Under the claim-of-right doctrine in 26 U.S.C. § 1341, a taxpayer who included an amount in income and later has to give it back picks whichever of two methods produces the lower tax.⁷

Deduction method. Claim the repayment as a deduction on the return for the year you paid it back.
Credit method. Recalculate what your taxes would have been in the original year if you had never received the payment, then take a credit for the difference between what you actually paid and what you would have paid. This method often works better when tax rates were higher in the year you received the original payment.

The credit method is only available when the repayment exceeds $3,000. The IRS treats clawback repayments as claim-of-right restorations rather than theft losses, and you need documentation from the trustee substantiating both the obligation to repay and the payment itself.⁸

1
Office of the Law Revision Counsel. 11 USC 547 – Preferences
2
Office of the Law Revision Counsel. 11 USC 101 – Definitions
3
Office of the Law Revision Counsel. 28 USC 1409 – Venue of Proceedings Arising Under Title 11
4
GovInfo. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
5
Office of the Law Revision Counsel. 11 US Code 546 – Limitations on Avoiding Powers
6
Office of the Law Revision Counsel. 11 USC 550 – Liability of Transferee of Avoided Transfer
7
Office of the Law Revision Counsel. 26 US Code 1341 – Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right
8
Internal Revenue Service. FAQs Related to Ponzi Scenarios for Clawback Treatment