Table of Contents
- How to Evaluate Ordinary Course, New Value, and Other Preference Defenses
- Why Defense Analysis Often Matters More Than The Demand Letter
- What Makes A Preference Defense Worth Evaluating
- 1. How To Evaluate The Ordinary Course Defense
- Start With The Subjective Test
- Questions That Often Help
- Documents That Often Matter Most
- When The Objective Test Becomes Important
- 2. How To Evaluate The Subsequent New Value Defense
- The Core Idea
- The Timing Sequence Is Critical
- Typical New Value Sources
- The Unpaid-New-Value Debate
- How The Math Often Works
- 3. How To Evaluate The Contemporaneous Exchange Defense
- Common Scenarios
- What Evidence Often Helps
- 4. How To Evaluate Other Preference Defenses That Often Surface
- Enabling Loan Defense
- Floating Lien And Improvement-In-Position Issues
- Domestic Support, Consumer Debt, And Small-Dollar Limitations
- 5. What Red Flags Can Weaken These Defenses
- 6. How To Build A Practical Preference Defense Review
- 1. Confirm The Basic Preference Universe
- 2. Reconstruct The Relationship History
- 3. Track Post-Payment Value
- 4. Isolate Special-Fact Defenses
- 7. Why Forum And Case Law Still Matter
- 8. When Creditors Often Bring In Counsel
- Short Summary
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How to Evaluate Ordinary Course, New Value, and Other Preference Defenses
A bankruptcy preference demand can feel deceptively simple: a trustee, debtor-in-possession, or plan administrator says your company got paid during the preference period and asks for the money back. But the real analysis usually starts after that first demand arrives. Many preference claims turn on defenses under 11 U.S.C. § 547(c), especially ordinary course of business, subsequent new value, and contemporaneous exchange for new value. Those defenses can materially change exposure, settlement posture, and the quality of the response. If you want a broader refresher on how preference claims work in the first place, this overview of clawback risk, the 90-day window, insider payments, and defense strategy provides the larger framework.
In this post, you’ll learn how to evaluate the most common preference defenses, what records often matter most, where the gray areas usually appear, and how creditors and their counsel often approach the analysis in real cases.
Why Defense Analysis Often Matters More Than The Demand Letter
A demand letter often lists transfers, total dollars, and a short explanation of why the sender views those payments as avoidable. That is only part of the picture. Section 547 itself builds in multiple statutory defenses, and Congress has also directed trustees to account for “known or reasonably knowable affirmative defenses” as part of their due diligence under the statute. The same section also defines the basic 90-day lookback for most creditors, the one-year lookback for insiders, and the elements of a preference claim. Cornell’s Legal Information Institute reproduces the statutory text, and the U.S. Department of Justice’s Civil Resource Manual discusses the policy behind preference law and several of the common defenses.
That framework matters because two claims with the same payment total can have very different value once defenses are mapped invoice by invoice. In general terms, preference defense work is often less about broad labels and more about timing, course of dealing, credit terms, shipment history, payment application, and what happened after each transfer.
What Makes A Preference Defense Worth Evaluating
A defense is worth evaluating whenever the payment history reflects something other than an unusual collection event. That can include:
- a long-running vendor relationship with relatively stable invoicing and payment timing
- continued shipments or services after a payment was received
- COD, cash-in-advance, or otherwise near-simultaneous exchanges
- payments tied to standard terms used before financial distress surfaced
- recurring industry practices that help explain timing or method of payment
- situations where a trustee’s demand appears to treat every transfer the same, even though the payment ledger tells a more nuanced story
Not every fact pattern supports a defense. For example, a sudden payment plan, threats to cut off supply, legal pressure, bounced checks, or dramatic aging deterioration can complicate an ordinary-course argument. Still, those issues do not always end the analysis; they often narrow it.
1. How To Evaluate The Ordinary Course Defense
The ordinary course defense appears in 11 U.S.C. § 547(c)(2). In simplified terms, the defense can protect a transfer if the debt was incurred in the ordinary course of business or financial affairs of the debtor and creditor, and the transfer was made either in the ordinary course between those parties or according to ordinary business terms.
That “either/or” structure matters. Before the 2005 amendments, the statute was more demanding. The current version allows a defendant to prove the subjective test based on the parties’ own history, or the objective test based on ordinary business terms in the relevant industry. Commentary from the Department of Justice and recent case discussions such as Jones Day’s write-up of an Ohio bankruptcy decision both emphasize that the defense is designed to leave ordinary financial relations undisturbed.
Start With The Subjective Test
The subjective test asks a practical question: Were these payments ordinary as between this debtor and this creditor?
Courts often look at factors like:
- historical timing of payments compared with preference-period timing
- average days-to-pay before and during the preference period
- range and consistency of payment lag
- method of payment
- collection pressure, if any
- changes in credit limits or terms
- whether payments were made in lump sums, under a payment plan, or in response to unusual pressure
A recent discussion of the amended ordinary-course standard notes that courts may focus heavily on the parties’ historical baseline, and that even a single outlier payment can fall outside the defense if it diverges materially from prior practice. See Jones Day’s analysis.
Questions That Often Help
When evaluating the subjective ordinary-course defense, some useful questions include:
- How long had the parties been doing business before the preference period?
- What were the stated payment terms?
- What were the actual payment patterns, not just the contractual terms?
- Did the debtor begin paying materially slower or faster during the preference period?
- Did the creditor change its collection behavior?
- Were there emails demanding immediate payment, threatening hold shipments, or conditioning future work on payment?
- Were checks replaced with wires, cashier’s checks, or unusual payment methods?
- Were old invoices suddenly targeted while current invoices remained unpaid?
Documents That Often Matter Most
The most useful records are often mundane:
- accounts receivable aging reports
- invoice and payment ledgers
- remittance detail
- credit applications and terms
- customer notes from collections staff
- emails about payment status, holds, or escalations
- shipping records
- internal payment history reports showing average and median days-to-pay
In many cases, the defense gets stronger or weaker based on whether the creditor can build a credible historical baseline. The point is not merely to say, “This customer always paid late.” The point is to show, with records, how late, how consistently, and whether the challenged payments fit the established pattern.
When The Objective Test Becomes Important
If the parties’ history is thin or messy, the objective test may become more important. That test examines whether the payments were made according to ordinary business terms in the relevant industry. Courts have sometimes required evidence about common credit practices among comparable businesses, though the exact framing varies by circuit and case. The Jones Day discussion highlights how courts may debate the right industry reference point and how burdensome competitor-specific proof can be.
In practical terms, the objective test may involve:
- declarations from experienced credit professionals
- trade practice evidence
- industry publications
- expert analysis on credit terms and payment range
- proof that modest lateness is customary in a particular sector
This part of the defense can become technical quickly, which is one reason many creditors focus first on the subjective history.
2. How To Evaluate The Subsequent New Value Defense
The subsequent new value defense appears in 11 U.S.C. § 547(c)(4). The statute protects a creditor “to the extent” that, after receiving an alleged preference, the creditor gave new value to or for the benefit of the debtor that was not secured by an otherwise unavoidable security interest and on account of which the debtor did not make an otherwise unavoidable transfer.
The statutory definition of “new value” appears in the same section and includes money, goods, services, or new credit. Cornell LII provides the operative text.
The Core Idea
In simple terms, the defense asks whether the creditor replenished the estate after receiving a challenged payment. If a vendor received $100,000 and then shipped additional goods on unsecured credit worth $60,000 before bankruptcy, that later value may offset exposure in whole or in part, depending on the facts and the governing case law.
The policy rationale is well recognized: preference law is not aimed at punishing creditors who continued to deal with a struggling debtor in a way that provided additional value. The DOJ Civil Resource Manual describes this as a codification of the “net result” concept.
The Timing Sequence Is Critical
For subsequent new value, sequence matters:
- the creditor receives a transfer,
- then the creditor provides new value afterward.
If the goods or services came first and the payment came later, that later transfer may not be offset by the earlier shipment under this defense. Timing often turns on invoice dates, shipment dates, delivery dates, service periods, and payment-clearance dates.
Typical New Value Sources
Common examples include:
- inventory shipped after payment
- professional or trade services performed after payment
- additional unsecured credit extended after payment
- labor, materials, or ongoing support provided after payment
The Unpaid-New-Value Debate
One of the most litigated issues is whether new value must remain unpaid to count. Courts have split on that question, and recent court materials continue to note that divide. For example, a recent bankruptcy court opinion available through GovInfo observed that circuits disagree over whether new value has to remain unpaid as of the petition date. Secondary analyses also note that in some jurisdictions, new value can still count unless the later payment for that value is itself unavoidable. See, for example, Shumaker’s summary of preference issues and NLRG’s discussion of Eleventh Circuit preference litigation.
Here’s what this often means in practice: the circuit, and sometimes the specific line of cases in the forum, can materially affect the math. A ledger that looks favorable in one jurisdiction may produce a smaller offset in another.
How The Math Often Works
Preference defendants and their counsel often build a running schedule:
- list each alleged transfer by date
- list each later shipment/service by date and amount
- identify whether the later value was unsecured
- identify whether that later value was later paid, and if so, whether that later payment is itself avoidable or otherwise protected
- calculate the remaining net exposure
This is one reason a preference defense review often becomes a data exercise before it becomes a legal brief.
3. How To Evaluate The Contemporaneous Exchange Defense
Another important defense appears in 11 U.S.C. § 547(c)(1). It protects transfers intended by the debtor and creditor to be a contemporaneous exchange for new value and that were, in fact, substantially contemporaneous.
This defense often appears where the transaction looked less like debt collection and more like a near-simultaneous trade.
Common Scenarios
Examples can include:
- cash on delivery arrangements
- payment at shipment or delivery
- replacement of dishonored payment with immediate good funds in some contexts
- short-gap exchanges where the parties intended an immediate swap of value
The hard questions usually involve intent and timing. The parties may describe a payment as contemporaneous, but the documents may show the payment actually satisfied older invoices. Recent court opinions continue to examine whether the exchange was truly intended as contemporaneous and whether it was substantially contemporaneous in fact. See, for example, a district court opinion on GovInfo.
What Evidence Often Helps
- invoice language and remittance detail
- COD terms or cash-in-advance documentation
- proof of shipment or delivery timing
- communications showing the parties expected an immediate exchange
- accounting application showing payment matched current goods or services, not older debt
This defense can overlap with new value, but it is not the same analysis. Contemporaneous exchange is usually about one exchange that was meant to be immediate. Subsequent new value is about later value given after an earlier transfer.
4. How To Evaluate Other Preference Defenses That Often Surface
Although ordinary course and new value often get the most attention, several other defenses can matter depending on the facts.
Enabling Loan Defense
Section 547(c)(3) addresses certain purchase-money style transactions where new value enabled the debtor to acquire property and perfection occurred within the required statutory time. This arises more often with secured financing and equipment transactions than with ordinary trade debt. The statutory text is available in § 547.
Floating Lien And Improvement-In-Position Issues
Section 547(c)(5) addresses secured creditors with floating liens in inventory or receivables and uses an improvement-in-position test. The DOJ Civil Resource Manual summarizes the concept and notes that the analysis compares the creditor’s position at two points in time.
Domestic Support, Consumer Debt, And Small-Dollar Limitations
Section 547 also includes carveouts and thresholds that can narrow exposure in certain cases. For business cases, one current threshold worth noting is the minimum amount for certain non-consumer preference actions under § 547(c)(9). The Judicial Conference’s 2025 inflation adjustment increased that figure from $7,575 to $8,575 for cases filed on or after April 1, 2025, as reflected in the Federal Register notice and notices from U.S. Bankruptcy Courts. That threshold is not the whole analysis, but it can affect whether some smaller claims are even pursued.
5. What Red Flags Can Weaken These Defenses
Defense analysis often becomes more difficult when the record reflects unusual collection pressure or unusual payment behavior. Some recurring red flags include:
- installment plans created during the preference period
- threats to stop shipping unless arrearages were paid
- lawsuits, formal default notices, or aggressive collection calls
- a sudden shift from checks to wires
- lump-sum catch-up payments on stale invoices
- materially older aging buckets during the preference period than before
- shortened credit terms imposed late in the relationship
- insider involvement or non-standard payment routing
These facts do not automatically defeat a defense, but they often become focal points in negotiations and litigation.
6. How To Build A Practical Preference Defense Review
A practical review often starts with a transaction spreadsheet rather than a legal memo. Some creditors and attorneys break the work into four stages.
1. Confirm The Basic Preference Universe
Map the petition date, calculate the preference period, identify each challenged transfer, and confirm whether the claimant is analyzing the correct debtor, account, and transfer dates. If you are earlier in the process, this discussion of responding before paying too fast would naturally be the next read once published.
2. Reconstruct The Relationship History
Build a baseline covering at least the pre-preference period and the preference period:
- invoice dates
- due dates
- payment dates
- days from invoice to payment
- collection events
- changes in terms or credit holds
This step usually drives the ordinary-course analysis.
3. Track Post-Payment Value
For each alleged transfer, identify all later goods, services, or credit extended before the petition date. This step often drives the subsequent-new-value analysis.
4. Isolate Special-Fact Defenses
Flag COD periods, prepayments, secured transactions, lien releases, or unusual exchange structures that may support contemporaneous exchange or other defenses.
A detailed review can also surface errors in the claimant’s own schedule. For example, payment applications may have been misread, duplicate transfers may have been included, or post-petition items may have been mixed into the analysis.
7. Why Forum And Case Law Still Matter
Preference law is federal, but interpretation still varies. The unpaid-new-value issue is a well-known example of circuit-level disagreement, and ordinary-course analysis can also vary in emphasis from one court to another. Recent court materials and commentary continue to reflect those differences, especially around what counts as the relevant industry for the objective test and how rigidly courts compare payment history. See GovInfo’s recent opinion discussing the circuit split on subsequent new value and Jones Day’s recent discussion of ordinary-course proof.
That is one reason settlement leverage often depends not just on the invoices, but on where the case is pending and how that court tends to approach these defenses. If you later want to avoid common errors in that process, a related piece on the kinds of missteps that can quietly reduce settlement leverage fits naturally with this topic once available.
8. When Creditors Often Bring In Counsel
Some companies can organize the records internally, but counsel often becomes especially useful where:
- the transfer amount is significant
- the forum’s case law is nuanced or unfavorable
- ordinary-course history is mixed
- new-value calculations are disputed
- a trustee has already filed suit
- multiple affiliate debtors or accounts are involved
- a settlement proposal assumes little or no credit for defenses
An attorney might help translate the data into the legal framework the claimant and court will actually use. That often includes narrowing the exposure, identifying what evidence is still missing, and shaping a response that reflects documented defenses rather than generalized pushback. If the demand has already triggered the usual first-wave questions, a practical companion topic is the list of questions creditors often ask right after a demand arrives, once that article is live.
Short Summary
Evaluating ordinary course, new value, and other preference defenses is usually an exercise in evidence, sequence, and context. Ordinary course often turns on whether the challenged payments match the parties’ historical pattern or ordinary industry practice. Subsequent new value often turns on what the creditor gave after each payment, how that value was documented, and how the forum treats later payment of that value. Contemporaneous exchange often turns on intent and whether the transfer was truly part of a near-immediate swap.
The earlier that analysis begins, the easier it often is to preserve the records that matter and frame the conversation around real defenses instead of the face amount of the demand.
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