A preference (or preferential transfer) is a payment or transfer a debtor made to one creditor shortly before filing bankruptcy that the bankruptcy trustee can "claw back" so that all similar creditors are treated equally. It is a federal bankruptcy concept governed by the U.S. Bankruptcy Code, 11 U.S.C. § 547 — there is no Missouri statute that creates it. The idea is that a debtor sliding toward bankruptcy should not be able to pay one creditor in full while leaving others unpaid; the law lets the estate recapture that payment and redistribute it fairly.
How a preference works in bankruptcy
Under the federal Bankruptcy Code, 11 U.S.C. § 547, a transfer is generally preferential when it was made to an ordinary creditor in the 90 days before the bankruptcy filing — or up to one year for an "insider," such as an officer, director, relative, or affiliated company. The transfer must have been made while the debtor was insolvent (which the Code presumes during the 90 days before filing), and it must have let the creditor receive more than it would have in a Chapter 7 liquidation. The purpose is equal treatment: undoing payments that gave one creditor a head start so all similarly situated creditors share the debtor's limited assets in proportion to what they are owed.
Why it matters
If your business was paid by a customer who later filed bankruptcy, you may receive a demand letter — or a lawsuit — asking you to return the money, even though you did nothing wrong and were simply paid what you were owed. A preference does not depend on fault. The good news is that the same federal statute provides defenses that often reduce or eliminate what you must give back, including the contemporaneous-exchange, ordinary-course-of-business, and new-value defenses. Understanding whether a payment is a preference — and which defenses apply — is what determines your real exposure.
Frequently Asked Questions
Is a preference governed by Missouri or federal law?
It is federal. Preferences arise under the U.S. Bankruptcy Code, 11 U.S.C. § 547, and are litigated in federal bankruptcy court. Missouri has no statute of its own that creates a preference.
How far back can a trustee reach to recover a preference?
Generally 90 days before the filing date for an ordinary creditor, and up to one year for an "insider" such as an officer, director, relative, or affiliated company.
Do I have to return the money if I did nothing wrong?
Not necessarily. A preference does not depend on fault. But federal defenses — especially ordinary-course-of-business and subsequent new value — frequently reduce or eliminate what you must return.
Legal Disclaimer
This page provides general legal information about Missouri law and is not legal advice. It does not create an attorney-client relationship. Every situation depends on its own facts, deadlines, and documents; consult a qualified Missouri attorney before acting.