If a customer paid you and then filed for bankruptcy, a trustee may later try to take that money back. This is called a preference action, and it is grounded entirely in federal law — the U.S. Bankruptcy Code, 11 U.S.C. § 547 — not in any Missouri statute. The trustee can "claw back" certain payments a debtor made shortly before filing so that all similarly situated creditors share the debtor's assets equally instead of one creditor keeping a head start.
Receiving a preference demand does not mean you cheated anyone — you were simply paid what you were owed. This guide is a plain-English orientation for Missouri business creditors: what a preference is, the elements a trustee must prove, the defenses the Code provides, how the process unfolds, and what to do first. For a deeper playbook, see our companion guide on defending against preference claims.
What a preference action actually is
Bankruptcy rests on the principle of equal treatment of creditors: those the debtor owed should share its limited assets in proportion to what they are owed, under the federal priority scheme. A preference is a payment or transfer made during the debtor's slide toward bankruptcy that upset that balance by giving one creditor more than its fair share.
When that happens, the trustee (in a Chapter 7 case) or the debtor-in-possession (in most Chapter 11 cases) can use the avoidance power under § 547 to unwind the transfer and pull the money back into the estate for redistribution to all creditors. Because preference law is federal, the rules are the same whether the case is filed in St. Louis, Kansas City, or Springfield — Missouri does not create or modify the preference action.
A crucial point for creditors: preference law is not about fault. The trustee need not show you knew the customer was struggling or did anything improper — only that the transfer fits the statutory definition.
The elements a trustee must prove
To recover a transfer under 11 U.S.C. § 547(b), the trustee generally must prove every one of the following. If even one is missing, the transfer is not preferential:
- A transfer of the debtor's property. Money, goods, a security interest, or any other interest of the debtor that left the debtor's hands.
- To or for the benefit of a creditor. Someone the debtor owed — including a payment to a third party that benefited you.
- On account of an antecedent debt. A debt that already existed before the transfer. You cannot "prefer" a debt that did not yet exist when payment was made.
- Made while the debtor was insolvent. The Code presumes insolvency during the 90 days before filing, so as a practical matter the creditor often must come forward with evidence of solvency to rebut it.
- Made within the reach-back period. Generally the 90 days before the filing date — but one year for an insider (see below).
- That let the creditor receive more than it would have received in a hypothetical Chapter 7 liquidation if the transfer had not been made.
That final element ties directly to the federal distribution scheme. If you would have been paid in full anyway in a Chapter 7 — a fully secured creditor, for example — the payment usually did not improve your position relative to other creditors, so it is generally not preferential.
The 90-day window versus the one-year insider window
For an ordinary, arm's-length creditor, the reach-back is 90 days before the filing date. For an insider — an officer, director, controlling shareholder, relative of the debtor, or an affiliated company — Congress extended it to a full one year, on the theory that insiders are more likely to see trouble coming and arrange to be paid first. If you are unsure whether your relationship with the debtor makes you an insider, treat the question seriously: it dramatically changes your exposure.
The defenses the Bankruptcy Code gives creditors
Even when the trustee can establish all the § 547(b) elements, the same statute supplies powerful affirmative defenses under 11 U.S.C. § 547(c). These are where most preference disputes are won, narrowed, or settled. The creditor generally bears the burden of proving them, so documentation matters. The defenses you will hear about most often:
- Contemporaneous exchange for new value — § 547(c)(1). If the parties intended the payment to be a roughly simultaneous swap for new value (think cash-on-delivery), it is protected, because the debtor received equal value right then and the estate was not depleted.
- Ordinary course of business — § 547(c)(2). The workhorse defense. A payment is protected if the debt arose in the ordinary course and the payment was made either consistent with your and the debtor's own prior dealings, or according to ordinary terms in your industry. Consistent timing is the backbone of this defense.
- Subsequent new value — § 547(c)(4). If, after receiving a payment, you shipped more goods or provided more services on credit that went unpaid, that new value can offset the preference, often dollar-for-dollar.
Section 547(c) contains additional protections — for certain purchase-money security interests, perfected security interests in inventory and receivables, statutory liens, and domestic support obligations, among others. More than one defense often applies at once. Our defending against preference claims guide walks through how to build and document each.
How a preference action unfolds
Most preference matters move through a predictable sequence, and understanding it helps you respond at the right level of urgency.
The demand letter
It usually starts with a demand letter from the trustee or debtor-in-possession identifying the payments and asking you to return them, often by a deadline. A demand letter is not yet a lawsuit, but it should never be ignored. The trustee is generally expected to consider your reasonably knowable defenses before demanding payment, so a prompt, documented response can shrink or end the matter early.
The adversary proceeding
If the demand is not resolved, the trustee files an adversary proceeding — a separate lawsuit within the bankruptcy case, with its own complaint, summons, answer, discovery, and trial. These are heard in the U.S. Bankruptcy Court for the Eastern or Western District of Missouri when the underlying case is in Missouri. If you are served with a complaint, you typically have a limited window (often about 30 days) to answer before risking a default judgment for the full amount.
Practical first steps when you get a preference demand
A creditor that responds methodically almost always fares better than one that ignores the demand or pays it in full. As a starting checklist:
- Do not ignore it, and calendar every deadline — especially the answer deadline if you have been served with a complaint.
- Confirm the basics: that the bankruptcy was actually filed, the filing date, the district, and whether the demand arrives within the trustee's time to sue.
- Pull your records for that customer — invoices, your accounts-receivable aging, proof of payment, and shipping documents — ideally going back a year or two.
- Map the payment history so you can compare the challenged payments to how the customer normally paid (the foundation of the ordinary-course defense).
- Identify any new value you provided after each payment that went unpaid.
- Assert your defenses in writing , clearly and with documentation, before assuming you owe anything.
- Negotiate or litigate from strength — most preference claims settle, and a well-documented defense usually drives the number well below the demand.
Because these steps are the heart of defending a claim, the companion defense guide develops each in detail.
Frequently Asked Questions
What is a preference action in bankruptcy?
It is a trustee's effort, under 11 U.S.C. § 547, to recover ("claw back") certain payments a debtor made to a creditor shortly before filing bankruptcy. The goal is equal treatment: undo transfers that let one creditor receive more than its fair share so the money can be redistributed to all creditors.
Is preference law federal or Missouri state law?
It is federal. Preference actions arise under the U.S. Bankruptcy Code and are litigated in federal bankruptcy court — for a Missouri debtor, the U.S. Bankruptcy Court for the Eastern or Western District of Missouri. Missouri state law does not create the preference action.
How far back can the trustee reach?
Generally 90 days before the filing date for an ordinary creditor. For an insider — such as an officer, director, controlling owner, relative, or affiliated company — the reach-back extends to one year.
Do I have to return the money if I did nothing wrong?
Not necessarily. A preference does not depend on fault or knowledge — being paid what you were legitimately owed can still qualify. But the statutory defenses under § 547(c), especially ordinary-course-of-business and subsequent new value, frequently reduce or eliminate what you must return.
What does it mean that I "received more than in a Chapter 7"?
This § 547(b) element compares what you actually received to what you would have received under the federal Chapter 7 distribution scheme had the transfer not occurred. If you would have been paid in full anyway (for example, as a fully secured creditor), the payment generally is not a preference.
What should I do first if I receive a preference demand?
Do not ignore it. Calendar any deadlines, confirm the filing details, gather your payment and shipping records for that customer, and assert your defenses in writing rather than assuming you owe the full amount. Given the stakes and strict deadlines, it is wise to consult a Missouri bankruptcy attorney early.
Legal Disclaimer
This guide provides general legal information about federal bankruptcy law as it affects Missouri businesses and is not legal advice. It does not create an attorney-client relationship. Preference law is federal, fact-specific, and governed by strict deadlines; if you receive a preference demand or are served with an adversary complaint, consult a qualified attorney admitted in the relevant Missouri bankruptcy court promptly.