Bankruptcy ✦ Preference Clawback Defense
You Got Paid. Then the Trustee Asked for It Back.
A customer files bankruptcy, and months later a demand letter arrives: return the payments you received, because the law calls them preferences. It feels outrageous, and it is defensible. North Star Law Firm defends New Mexico businesses and creditors against preference clawback claims, from the demand letter through litigation.
Watch First
Preference clawbacks explained in plain English
Phillip Zagotti walks through how preference claims work, why honest creditors get targeted, and the defenses that actually reduce what you pay.
The Law
What is a preference, and why can the trustee claw it back?
Under 11 U.S.C. § 547, a bankruptcy trustee can recover payments a debtor made on existing debts within 90 days before the filing (a full year for insiders) while the debtor was insolvent, if the payment let the creditor do better than it would in the liquidation. Notice what is missing from that list: any wrongdoing by you. Preference law exists to unwind the last-minute race among creditors, so the trustee’s complaint is not an accusation. It is arithmetic, and it is answered with arithmetic.
The statute builds in defenses, and they carry real money. The table below is the map the demand letter hopes you never read.
| Defense | Authority | How it works |
|---|---|---|
| Ordinary course of business | § 547(c)(2) | Payments consistent with your historical dealing with the debtor, or with industry terms, are protected. Your invoice-to-payment baseline is the evidence. |
| Subsequent new value | § 547(c)(4) | Goods or services you provided after a payment offset the clawback dollar for dollar. Suppliers who kept shipping often owe far less than demanded. |
| Contemporaneous exchange | § 547(c)(1) | Payment made at the time of delivery (COD terms, deposits against delivery) was never on account of an old debt at all. |
| Thresholds & venue floors | § 547(c)(9); 28 U.S.C. § 1409 | Small claims are barred outright, and modest out-of-state claims can’t be hauled to a distant court. |
What should you do when the demand letter arrives?
Three things, in order. Don’t pay the sticker price: the letter typically demands every transfer in the window, before defenses, because many recipients simply write a check. Don’t ignore it either: unanswered demands become adversary proceedings in the bankruptcy court, and default is the most expensive defense of all. And assemble the payment history, because every defense above is proven from your own records. The realistic goal in most cases is a negotiated resolution at a fraction of the demand, reached after the trustee sees a defense analysis that would hold up at trial.
Why an attorney-CPA for a preference fight?
Because preference defense is forensic accounting wearing a litigation suit. Ordinary course is a statistical argument about payment timing baselines. New value is a running ledger computation. Insolvency, which the trustee must ultimately establish, is a balance-sheet fight. Building those analyses is CPA work, arguing them is lawyer work, and having both in one advocate, admitted to the United States Bankruptcy Court for the District of New Mexico, means the numbers and the negotiation never lose anything in translation.
The Attorney-CPA Difference
The trustee has a spreadsheet. Bring a better one.
- Transfer-by-transfer defense analysis before any number is discussed
- Ordinary course baselines and new value ledgers built to evidentiary standards
- Threshold and venue defenses checked before anything else
- Negotiated resolutions with trustees, and litigation when the demand deserves it
Questions & Answers
Preference clawback questions, answered
I did nothing wrong. Why is the trustee suing me?
Preference law is no-fault by design. The trustee doesn’t have to show you did anything improper, only that you got paid on an old debt during the look-back window while the debtor was insolvent. The point of the statute is equal treatment among creditors, which is cold comfort when you’re the one being asked to give money back. The defenses exist for exactly this reason.
How long does the trustee have to reach back?
Ninety days before the bankruptcy filing for ordinary creditors, and one full year for insiders such as owners, relatives, and affiliated companies. Payments outside those windows are not preferences at all, so nailing down the exact transfer dates is always the first task.
Should I just settle the demand letter?
Not before the defenses are quantified. Trustee demand letters routinely claim the gross amount of every transfer in the window, ignoring new value and ordinary course defenses that can shrink the real exposure dramatically. Settlements happen in most cases, but the number should follow the analysis, not the letter.
What records do I need to defend a preference claim?
The complete payment history with the debtor, not just the preference window: invoices, due dates, payment dates, shipping records, and any collection communications. Ordinary course defenses are proven with baseline history, and new value defenses with post-payment shipments. The books make the case, which is why an attorney-CPA defense starts in the ledgers.
Is there a minimum amount the trustee can chase?
Yes. The Bankruptcy Code sets floors that knock out small claims, including a minimum threshold for preferences in business cases, and venue protections that keep smaller out-of-state defendants from being dragged to a distant court. Part of the first review is checking whether the claim clears those gates at all.
The demand letter has a deadline. So does your leverage.
Free review of the demand and your payment history with an attorney-CPA, including a first read on what the defenses are worth.