A voidable preference is a payment a debtor made to a creditor shortly before filing for bankruptcy that the bankruptcy trustee can recover and redistribute to all creditors. The rule lives in 11 U.S.C. § 547, and it exists because bankruptcy law treats similarly situated creditors alike: a last-minute payment that puts one creditor ahead of the pack gets pulled back into the estate. If you received money from a customer that later filed, the trustee may ask for it back. Whether they can actually take it depends on five specific elements and a set of defenses that often decide the case.
What the Trustee Has to Prove
The trustee cannot recover every pre-bankruptcy payment. Section 547(b) lists five elements, and all five must be present. Miss one, and the payment stands.
First, the transfer must involve the debtor’s own property and must go to or benefit a creditor. Money paid by a third party, such as a guarantor using its own funds, doesn’t count because it never belonged to the estate.
Second, the payment must have been on a debt that already existed. Cash-on-delivery transactions fail this element because the debt and the payment arise together.
Third, the debtor must have been insolvent when the payment was made, meaning total debts exceeded the fair value of total assets. The law presumes insolvency during the 90 days before filing, so the creditor carries the burden of proving otherwise. That usually requires a balance-sheet analysis for the exact date of the transfer, which is difficult and expensive.
Fourth, the payment must fall inside the look-back window. For ordinary creditors, that window is 90 days before the petition date. For insiders, it stretches to a full year. The Bankruptcy Code defines “insider” broadly: for a corporate debtor, it includes directors, officers, anyone who controls the company, and their relatives; for an individual debtor, it includes relatives, partnerships where the debtor is a general partner, and companies where the debtor is a director or officer. The longer period reflects the fact that insiders tend to see trouble first and can move money before outside creditors know anything is wrong.
Fifth, the creditor must have received more than it would have gotten in a Chapter 7 liquidation. For unsecured creditors, the answer is almost always yes, because unsecured claims in Chapter 7 usually recover very little. A fully secured creditor paid within the value of its collateral generally does not face preference exposure, because it would have collected the same amount from the collateral anyway.
Defenses That Can Protect the Payment
Even when all five elements are satisfied, several defenses can shield a payment. The creditor bears the burden here, so records matter. Most preference disputes are won or lost on documentation.
Contemporaneous Exchange for New Value
If both parties intended the payment to be a simultaneous swap for new value, and the exchange really was roughly simultaneous, the transfer is protected. A COD sale is the standard example: a check hands over as the inventory arrives. No one gains an unfair advantage in a simultaneous exchange, so the policy behind preference law doesn’t apply.
Ordinary Course of Business
This is the most commonly litigated defense. It protects payments that fit how the debtor and creditor normally did business. The statute offers two alternative tests, and the creditor only needs to satisfy one.
The first looks at the parties’ own history. If the debtor typically paid invoices around 25 days after receipt, and the challenged payment landed on day 27, it fits the established pattern. Courts examine the timing, amounts, and methods of prior payments to decide whether the challenged payment was unusual.
The second looks at industry norms. A payment can still be protected if it lined up with how businesses in the relevant sector generally pay their bills, even if it deviated from the parties’ own history. Proving industry norms often requires expert testimony.
Subsequent New Value
This defense reduces the trustee’s recovery by the value of any new goods, services, or credit the creditor provided after receiving the challenged payment. If a creditor received $10,000 and then shipped $4,000 in additional unpaid inventory, exposure drops to $6,000. Two conditions apply: the new value cannot be secured by a security interest that would survive avoidance, and the debtor cannot have already made a non-avoidable payment for it. In practice, this defense rewards creditors who kept doing business with a struggling customer rather than cutting them off.
Small Transfer Safe Harbor
Small preferences aren’t worth pursuing, so the Code exempts them. For cases where the debtor’s debts are not primarily consumer debts, the threshold is $8,575 as of April 1, 2025. The Judicial Conference adjusts this figure every three years based on the Consumer Price Index. For individual debtors whose debts are primarily consumer debts, a separate, lower threshold of $600 applies.
Other Protections
A transfer that creates a security interest in newly acquired property to secure a loan that funded the purchase is protected. So is a bona fide payment on a domestic support obligation incurred in the ordinary course. These come up less often but can decide the right case.
The Trustee’s Due Diligence Duty
Since 2019, trustees cannot simply mail demand letters to every creditor who received a payment in the 90-day window. The Small Business Reorganization Act amended Section 547(b) to require the trustee to exercise “reasonable due diligence in the circumstances of the case” and take into account the creditor’s “known or reasonably knowable affirmative defenses” before filing suit. The amendment targeted “preference mills” that sent mass demands with no real investigation, counting on quick settlements. If the trustee sues without meeting this standard, the creditor can raise that failure as a defense to the claim.
How Recovery Actually Unfolds
The process usually starts with a demand letter identifying the specific payments, amounts, and legal basis for recovery. The letter often proposes a settlement, and many claims resolve at this stage because both sides want to avoid litigation costs. Creditors with strong defenses can negotiate significant reductions; those without defenses may settle at a discount that reflects what the trustee would spend to litigate.
When settlement fails, the trustee files an adversary proceeding in the bankruptcy court. It functions like a civil lawsuit inside the bankruptcy case, governed by Part VII of the Federal Rules of Bankruptcy Procedure. The trustee proves the five elements; the creditor then presents any defenses.
Under Section 550, once a transfer is avoided the trustee can recover the property or its value from the initial recipient or from anyone who received it downstream. Moving the money through a subsidiary or affiliate doesn’t cut off liability.
The trustee also has a filing deadline. Under Section 546(a), an avoidance action must be brought before the earlier of (1) two years after the order for relief, or one year after the first trustee is appointed if that appointment happens within the initial two-year window; or (2) the date the case is closed or dismissed. Most preference actions get filed within the first two years. A demand letter that arrives close to that deadline actually weakens the trustee’s leverage, because the clock is running against them too.
What to Do If You Get a Preference Demand
Ignoring the letter is the worst option. If you do nothing, the trustee will very likely file an adversary proceeding for the full amount and you lose any chance to negotiate from strength.
Paying the demanded amount is nearly as bad. Initial letters often ask for the full preference or offer a token discount of 5 to 15 percent, but creditors with real defenses regularly settle for far less.
Start by gathering records. For an ordinary-course defense, you need invoices and payment histories covering the 90-day preference period and a baseline period of one to two years before it. For a contemporaneous exchange defense, you need delivery records showing that goods or services moved at roughly the same time as the payment. For a subsequent new value defense, you need documentation of any unpaid goods or services you provided after receiving the challenged payment.
With records in hand, consult a bankruptcy attorney before responding. An experienced attorney can evaluate your exposure, identify your strongest defenses, and shape a response that positions you for the best outcome. The strength of your documentation often decides whether the claim settles at ten cents on the dollar or ninety.