Unfair Preference Claims: Elements, Defenses, and Look-Back Periods

Unfair preference claims in bankruptcy let a trustee recover payments a debtor made to a creditor shortly before filing, on the theory that those payments gave one creditor a better deal than the rest would get in liquidation. For a standard creditor, the reach is 90 days before the petition; for insiders, a full year. Not every payment in that window is recoverable, and several defenses built into the Bankruptcy Code protect normal commercial activity from clawback.

If you’ve received a demand letter, the practical question is whether the payment satisfies all five statutory elements and whether a defense fits your facts. Both pieces matter, because the trustee carries the burden on the elements and you carry it on the defenses.

What the Trustee Has to Prove

A payment is only recoverable as a preference if the trustee can establish all five of these points:¹

The transfer went to a creditor, or was made for a creditor’s benefit.
It paid down a debt that already existed when the payment was made. A cash purchase of new goods doesn’t count because no prior debt was being satisfied.
The debtor was insolvent at the time, meaning liabilities exceeded the fair value of assets. The law presumes insolvency during the 90 days before filing, so the trustee doesn’t have to prove it independently for payments in that window.
The transfer fell inside the look-back period: 90 days for ordinary creditors, one year for insiders.
The payment gave the creditor more than it would have received in a Chapter 7 liquidation where assets were distributed proportionally.

That last element is where many claims break down. A fully secured creditor who would have been paid in full in a hypothetical liquidation didn’t get an unfair advantage from being paid early. The trustee also has to show it did real homework before suing. Under the Bankruptcy Code, the trustee must perform reasonable due diligence that accounts for a creditor’s likely defenses before filing a preference action, and courts have dismissed complaints that offered only boilerplate allegations.¹

The Look-Back Period: 90 Days or One Year

The timing of the payment matters first, because anything outside the window is generally safe. Count backward from the petition date, excluding the filing date itself.

For ordinary vendors, lenders, and service providers, only payments made within 90 days before the filing are vulnerable.¹

When the recipient is an insider, the window stretches to a full year. The Bankruptcy Code defines insiders broadly based on who the debtor is:²

For individual debtors: relatives, a partnership where the debtor is a general partner, or a corporation the debtor directs or controls.
For corporate debtors: directors, officers, controlling persons, general partners, and relatives of any of them.
For partnership debtors: general partners, controlling persons, and relatives of those individuals.
For any debtor: affiliates, insiders of affiliates, and managing agents.

One important wrinkle: for insider transfers made between 90 days and one year before filing, the trustee cannot rely on the presumption of insolvency and has to actually prove the debtor was insolvent on the date of the payment.¹

Dollar Floors and Where the Suit Can Be Filed

Small payments are exempt by statute. In an individual case where the debtor’s debts are primarily consumer debts, aggregate transfers under $600 cannot be recovered. In a business case, the floor is $8,575 as of April 1, 2025, with periodic adjustments by the Judicial Conference.¹

Even above those floors, venue rules can keep smaller cases close to home. If the amount the trustee seeks is below the thresholds, the suit has to be filed in the federal district where the creditor lives, not in the bankruptcy court’s district:³

General money judgments: less than $1,725.
Consumer debts: less than $25,700.
Non-consumer debts against non-insiders: less than $31,425.

These figures were last adjusted effective April 1, 2025. For modest recoveries, the cost of traveling to the creditor’s district can take the economics out of the suit entirely.

How Long the Trustee Has to Sue

The preference power expires. The trustee must file the lawsuit before the earlier of two deadlines:⁴

Two years after the order for relief (in a voluntary case, the petition date), or one year after the first trustee is appointed or elected, whichever is later.
The date the case is closed or dismissed.

The one-year appointment extension exists because trustees are often appointed well after filing. But if the case closes or is dismissed first, the preference power dies with it regardless of how much time is left on the two-year clock.

Defenses That Protect the Payment

A demand letter isn’t a judgment. The Bankruptcy Code shields several categories of transfers that reflect normal business dealings rather than last-minute favoritism.¹

Contemporaneous Exchange for New Value

If both parties intended a payment to be a simultaneous swap for goods or services, and the exchange actually was substantially contemporaneous, the trustee cannot recover it. Cash on delivery is the clean example. A payment made weeks after delivery doesn’t qualify even if the parties label it contemporaneous; both the intent and the timing have to line up.

Ordinary Course of Business

Payments on a debt incurred in the ordinary course and paid in the ordinary course are protected. A creditor can establish this in one of two ways: the payment followed the normal pattern between those specific parties, or it matched terms that are standard for the industry. A vendor paid on its usual net-30 cadence throughout the preference period is in good shape. A vendor that suddenly got paid in 10 days when 60 was the historical norm has a problem.

Subsequent New Value

When a creditor receives a payment and then extends more credit or ships more goods, the later value offsets the earlier payment. A vendor that received $10,000 and then shipped another $8,000 of inventory on credit is only exposed to the $2,000 difference. The chronology matters: documentation has to show the new value came after the challenged payment.

Enabling Loans

A transfer that creates a security interest securing a loan used to buy specific property is protected, provided the lender perfects within 30 days after the debtor takes possession of the property. Equipment financing where the equipment itself is collateral is the standard example. The estate wasn’t depleted; the debtor gained an asset worth roughly what the loan funded.

Other Protected Transfers

Statutory liens that arise automatically by operation of law and aren’t otherwise avoidable.
Good-faith payments on domestic support obligations like child support or alimony.
Floating liens on inventory or accounts receivable, unless the creditor improved its position at the expense of unsecured creditors during the preference period.

Earmarking

Courts have recognized a judge-made defense called earmarking. When a new lender provides funds specifically to pay off an existing creditor, and those funds never become part of the debtor’s general assets, the payment isn’t treated as a transfer of the debtor’s property. The estate wasn’t diminished; one debt simply replaced another. The defense requires a clear agreement between the new lender and the debtor that the funds would go to a specific creditor, and the transaction must actually be carried out that way.

If You Return the Money, You Can File a Claim

A creditor who gives back a preferential payment isn’t shut out of the case. Federal law treats the resulting claim as if it existed before the bankruptcy filing, which means the creditor can file an unsecured claim for the returned amount and share in distributions.⁵ Unsecured recoveries in most Chapter 7 cases are modest, but a claim is better than nothing. File it on the schedule set by the court and the Federal Rules of Bankruptcy Procedure.

How the Process Usually Unfolds

Preference recovery typically starts with a demand letter identifying the specific payment, the amount, and the legal basis for the claim. These letters usually give the creditor a few weeks to respond and invite the creditor to present defenses. A significant share of claims settle at this stage because neither side wants the cost of litigation.

If talks stall, the trustee files an adversary proceeding, which is a lawsuit inside the bankruptcy case. The complaint has to plead all five elements and allege that the trustee did the required due diligence. The creditor files an answer and raises defenses, or risks a default judgment. The trustee can recover from either the initial recipient of the transfer or any party for whose benefit it was made.⁶

Discovery follows, with bank records, invoices, contracts, and depositions. Many bankruptcy courts require mediation before trial, and most actions settle. When a judgment is entered, it covers the original transfer along with applicable interest and costs, and the trustee can enforce it through garnishment or liens like any other money judgment.

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
Office of the Law Revision Counsel. 11 USC 546 – Limitations on Avoiding Powers
5
Office of the Law Revision Counsel. 11 USC 502 – Allowance of Claims or Interests
6
Office of the Law Revision Counsel. 11 USC 550 – Liability of Transferee of Avoided Transfer