1. What Must the Trustee Prove under Section 547?
A preference claim starts with the trustee's burden under 11 U.S.C. § 547(b). A creditor should test each statutory element before relying on an affirmative defense under § 547(c).
Test the Elements of Avoidability
- The transfer must be to or for the benefit of a creditor and for an antecedent debt.
- The debtor must have been insolvent when the transfer was made.
- The transfer must fall within the applicable period and satisfy the Chapter 7 comparison test.
Section 547(g) places the burden of proving avoidability on the trustee. Related bankruptcy litigation may turn on evidence that defeats one element.
Separate Claim Defects from Defenses
- Challenge transfer timing, creditor status, antecedent debt, or insolvency when the record supports it.
- Consider contemporaneous exchange under § 547(c)(1).
- Preserve ordinary-course and subsequent-new-value defenses.
The creditor bears the burden on § 547(c) defenses, so records should be organized by theory.
2. How Does the Ordinary Course Defense Work?
Section 547(c)(2) protects qualifying payments on debt incurred in the ordinary course of both parties' business or financial affairs. The payment may satisfy either of two alternative tests.
Compare the Parties' Actual Payment History
- Match invoices, due dates, payment dates, and payment methods.
- Identify unusual delays, collection pressure, or changes in payment terms.
- Compare the challenged transfers with the parties' established course of dealing.
This route focuses on whether the transfers remained ordinary between the debtor and creditor.
Evaluate Ordinary Business Terms
- Identify reliable evidence of payment practices in the relevant industry.
- Compare the challenged transfers with those practices.
- Keep industry evidence distinct from the parties' own payment history.
Under § 547(c)(2), either the parties' ordinary course or ordinary business terms may satisfy the payment requirement.
3. Can Insolvency or New Value Reduce Exposure?
Insolvency and subsequent new value address different parts of a preference case. Insolvency concerns the trustee's prima facie case, while § 547(c)(4) supplies a defense.
Review the Insolvency Presumption
- Section 101(32) generally uses a fair-valuation balance-sheet test for a business debtor.
- Section 547(f) presumes insolvency during the 90 days before the bankruptcy filing.
- Credible valuation evidence may rebut the presumption; the ultimate burden remains with the trustee.
The statutory insolvency test is not simply a cash-flow inquiry.
Build the Subsequent-New-Value Record
- Trace goods, services, or new credit supplied after a challenged transfer.
- Match invoices, shipments, and ledger entries to the payment chronology.
- Apply § 547(c)(4)'s limits involving secured new value and otherwise unavoidable later transfers.
Detailed transaction records can change the amount in dispute. Related creditor representation may involve the same account history.
4. Which Preference Period Applies?
The filing date, transfer date, and insider status define the potential preference period. Check them before reconstructing every payment.
Distinguish Ordinary and Insider Periods
| Transfer | Section 547(B)(4) Period |
|---|---|
| Non-insider transfer | Within 90 days before filing |
| Insider-specific extension | More than 90 days and up to one year before filing |
Non-insider transfer
- Section 547(B)(4) PeriodWithin 90 days before filing
Insider-specific extension
- Section 547(B)(4) PeriodMore than 90 days and up to one year before filing
The one-year insider extension is not a four-year preference lookback.
Confirm When the Transfer Was Made
- Review payment, lien, and perfection dates.
- Determine whether the transferee was an insider at the relevant time.
- Apply § 547(e)'s timing rules before accepting the complaint's chronology.
The § 547(f) insolvency presumption covers only the 90 days before filing.
5. How Do Secured Claims and Setoff Affect the Analysis?
Secured status does not create a blanket preference defense. Floating liens and setoff rights have separate statutory rules and require different records.
Review Floating-Lien Exposure
- Section 547(c)(5) addresses certain perfected interests in inventory, receivables, and their proceeds.
- Compare the creditor's secured position at the statutory measuring points.
- Review collateral values, advances, and perfection records.
The analysis asks whether the transfer improved the secured creditor's position under the statutory test.
Analyze Setoff under Section 553
- Confirm mutual prepetition debts between the creditor and debtor.
- Review § 553's exceptions and its 90-day improvement-in-position rule.
- Separate setoff issues from payment and lien defenses.
Broader bankruptcy and insolvency issues may affect claim treatment and recovery.
6. Should the Creditor Litigate or Negotiate?
A preference demand should prompt a record review rather than an automatic repayment. The decision to litigate or settle depends on the trustee's proof, available defenses, and litigation cost.
Prepare for an Adversary Proceeding
- Preserve contracts, invoices, ledgers, bank records, and collection communications.
- Organize evidence by § 547(b) element and § 547(c) defense.
- Check the complaint, service, response deadline, and applicable local rules.
Preference proceedings are core proceedings under 28 U.S.C. § 157(b)(2)(F) and generally proceed under Part VII of the Bankruptcy Rules.
Evaluate Settlement against the Record
- Compare the demand with documented defenses and disputed calculations.
- Address release scope, claim treatment, and litigation costs.
- Account for Rule 9019 approval when the estate's compromise requires court approval.
A negotiated amount should reflect the evidentiary record rather than the opening demand.
7. Frequently Asked Questions
Can a preference demand be defended before a lawsuit is filed?
Yes. A creditor may present payment history, new-value records, and supporting evidence during pre-suit negotiations.
Does repaying a preference automatically restore my bankruptcy claim?
Not automatically in every situation. Claim allowance and restoration depend on the Bankruptcy Code and case posture.
Can a payment involving a guarantor create preference issues?
Yes. The transfer, recipient, beneficiary, and source of payment may require separate analysis.
8. Review the Preference Claim before Paying
Several defenses can apply to the same payment, and the most useful evidence may predate the bankruptcy filing by months.
SJKP's attorneys can assess Section 547 elements, ordinary-course evidence, new value, insider timing, secured claims, and settlement options. Contact SJKP to review the demand and available federal bankruptcy defenses.
07 Oct, 2026
