Who is an insider for preference purposes?

11 USC § 101(31) defines insiders. For an individual debtor, insiders include relatives, general partners, and corporations of which the debtor is a director, officer, or person in control. For a corporate debtor, insiders include officers, directors, controlling persons, and their relatives. Transfers to insiders within one year before filing are subject to preference attack, not just 90 days.

What are common defenses to a preference claim?

11 USC § 547(c) lists defenses. The most common are contemporaneous exchange (payment that was intended as a contemporaneous exchange and was substantially contemporaneous), ordinary course of business (transfers in the ordinary course of the debtor's and recipient's business or financial affairs), and new value (creditor gave new value to the debtor after the alleged preference). Each defense has fact-intensive elements.

What is the small-claim minimum for preferences?

11 USC § 547(c)(8) prevents a preference action against an individual debtor whose debts are primarily consumer debts where the transfer is less than $600. § 547(c)(9) prevents preference recovery in a non-consumer case against any transfer aggregating less than the statutory threshold (currently around $7,575, adjusted every three years under § 104). These minimums protect small payments from preference attack.

How do I find out if I owe a preference?

Trustees notify recipients in writing. The notice typically demands return of the transfer or proposes a settlement. Many trustees file an adversary proceeding under FRBP 7001 if the recipient does not respond. Recipients who receive a demand letter should consult counsel quickly because the statute of limitations under § 546(a) gives the trustee two years from case commencement to bring the action.

Can I keep my preference if I have a defense?

Yes if you can prove a § 547(c) defense. Document the transactions carefully: invoices, payment dates, prior course of dealing with the debtor, and any new value given. Most preference disputes settle. Negotiated settlements often produce a discount of 20% to 50% off the demanded amount when the recipient has documentary support for a partial defense.

Preference Actions: How the Trustee Reaches Pre-Petition Payments (§ 547)

11 USC § 547(b) authorizes a trustee to avoid certain transfers of the debtor's property made to or for the benefit of a creditor for an antecedent debt while the debtor was insolvent, made within 90 days of filing (or one year for transfers to insiders), and that enabled the creditor to receive more than it would in a Chapter 7 distribution. All five elements must be met.

Why Preference Law Exists

Bankruptcy's core principle is equality of distribution among creditors of similar priority. 11 U.S.C. § 547 exists to enforce that principle by reaching back in time and pulling certain pre-petition payments back into the estate, so that all unsecured creditors share pro rata rather than being decided by who pressed hardest in the months before filing.

The technical name is "preferential transfer" or "voidable preference." A creditor that received a payment within the relevant lookback period may be required to return the payment to the estate, with the creditor then taking its place as a general unsecured claim sharing pro rata in the eventual distribution.

The Five Elements of a Preference

Section 547(b) authorizes the trustee to avoid a transfer that meets all five elements:

To or for the benefit of a creditor. The transfer must reach a creditor (directly) or benefit a creditor (indirectly through a third party who pays the creditor).
For or on account of an antecedent debt. The payment must be on a pre-existing obligation, not a contemporaneous exchange.
Made while the debtor was insolvent. Insolvency is presumed during the 90 days before filing under § 547(f).
Made within 90 days before the petition date (one year if the creditor was an insider).
Enables the creditor to receive more than it would have received in a Chapter 7 liquidation. Unsecured creditors who would have gotten 10 cents on the dollar but received 100 cents through a pre-petition payment have, by definition, received more.

All five elements must be present. Missing any one defeats the preference action.

The Insider 1-Year Lookback

Element 4 extends to one year for insider transfers. 11 U.S.C. § 101(31) defines insiders to include relatives of the debtor, partners of the debtor, corporations of which the debtor is a director or officer, and other categories.

The longer lookback exists because insiders are presumed to have inside information about the debtor's financial situation and are more likely to receive preferential payments. Common insider preferences: repayment of a loan from a parent, repayment of a loan from a business partner, payment to a wholly-owned corporation.

The § 547(c) Defenses

Even when all five § 547(b) elements are present, several defenses can defeat the preference action:

Contemporaneous exchange (§ 547(c)(1)). If the payment was for new value given at substantially the same time (e.g., COD purchase), it is not preferential.
Ordinary course of business (§ 547(c)(2)). Payments made in the ordinary course of the debtor's business or financial affairs and made according to ordinary business terms are protected. This defense is the most heavily litigated and most case-specific.
New value (§ 547(c)(4)). If the creditor gave new value to the debtor after the alleged preferential transfer, the new value reduces the preference amount.
Floating lien on inventory or receivables (§ 547(c)(5)). Properly perfected security interests in inventory or receivables are protected from preference attack on the underlying value.
Statutory liens (§ 547(c)(6)). Statutory liens that arise automatically (mechanic's liens, tax liens before assessment) are not avoidable as preferences.
De minimis (§ 547(c)(8) and (9)). In consumer cases, transfers totaling less than $700 (statutorily indexed) are protected; in non-consumer cases, less than $7,575.

Practical note for consumer debtors. Most consumer Chapter 7 cases produce no preference actions because trustees rarely pursue payments under $7,575. The recovery often does not justify the litigation cost. But large pre-petition payments to family members or to specific creditors can be recovered.

Common Consumer Preference Scenarios

Consumer debtors most commonly trigger preference issues through:

Repaying a loan from a parent, sibling, or other relative within the year before filing (insider, 1-year lookback)
Making a large lump-sum payment on a credit card or installment loan within 90 days before filing
Paying off a vehicle or other secured loan within 90 days using funds that could have benefited unsecured creditors
Returning property to a creditor in lieu of payment within the 90-day window

Procedure: The Adversary Action

Preference actions are adversary proceedings under FRBP 7001(1). The trustee files a complaint, the creditor answers, and the court adjudicates. Many preference cases settle before trial. The trustee may demand return of the full amount or accept a discounted settlement reflecting litigation risk.

The statute of limitations for preference actions is two years from the order for relief under § 546(a). Trustees who fail to file within that window lose the right to pursue.

Implications for Pre-Filing Planning

The preference window creates planning considerations for debtors who have flexibility on filing timing:

If a debtor has recently repaid a relative's loan, waiting 366+ days before filing places that payment outside the insider lookback window.
If a debtor has recently made large payments on specific creditors, waiting 91+ days may place those payments outside the general 90-day window.
Conversely, accelerating filing into a window where preference exposure is highest can be a strategic mistake.

Pre-filing planning to avoid preference exposure is legitimate. Pre-filing planning to defraud creditors (transferring assets to relatives, hiding property) is fraudulent transfer territory under § 548 — a different and more serious problem.

Preference vs. Fraudulent Transfer

Preference (§ 547) and fraudulent transfer (§ 548) are distinct theories:

Preference doesn't require fault. Even an entirely legitimate, contractually-required payment can be preferential. The 90-day window and antecedent-debt requirement do the work.
Fraudulent transfer requires either actual intent to hinder/delay/defraud creditors (actual fraud) or transfer for less than reasonably equivalent value while insolvent (constructive fraud).

The trustee can pursue either or both depending on the facts. State-law fraudulent-transfer remedies under the Uniform Voidable Transactions Act may also be available with longer reach-back periods (typically 4 years).

Preference Actions: How the Trustee Reaches Pre-Petition Payments (§ 547)

Why Preference Law Exists

The Five Elements of a Preference

The Insider 1-Year Lookback

The § 547(c) Defenses

Common Consumer Preference Scenarios

Procedure: The Adversary Action

Implications for Pre-Filing Planning

Preference vs. Fraudulent Transfer

Further Reading