Yes. A bankruptcy trustee can sue you to recover money that a customer paid to you before the filing, even if you earned it, issued an invoice for it, and did nothing wrong. These claims are called “preferences”, and the demand letters usually arrive one or two years after the payment was cleared.
The Lookback Period Depends on Who You Are
The trustee counts back from the petition date. Payments received in the 90 days prior to filing are subject to review under 11 U.S.C. § 547.
Insiders get a longer look. Officers, directors, relatives, general partners, and affiliated companies face a full year instead of 90 days. Owners who have repaid loans they have personally made to their struggling businesses are frequent targets.
Timing turns on when money actually moves. In the Seventh Circuit, which covers Wisconsin bankruptcy courts, a transfer happens when funds are transferred to the creditor’s control. It is not when a garnishment order is entered, nor when a check is written.
Five Elements, and the Trustee Needs Every One
A preference claim can only be successful if all of the following conditions are met:
- The payment was made to a creditor.
- It paid off a debt that the debtor already owed.
- The debtor was insolvent at the time, as the Code assumes during the final 90 days.
- It falls within the applicable lookback period.
- It left the debtor better off than they would have been in Chapter 7 bankruptcy.
These last two conditions can cancel out a lot of preference claims. A creditor with full security would have received full payment anyway, so the early payment only changes the timing and doesn’t affect the outcome.
The Defenses Creditors Actually Win On
Three defenses do most of the work here. Each one is yours to prove, so documentation is more important than argument.
Ordinary Course of Business
Payments made the way you and the customer have always done business are protected. Your invoice terms, average days to pay, and whether you tighten anything as the customer’s situation deteriorates will determine this defense.
Contemporaneous Exchange for New Value
Cash on delivery, or close to it. The estate loses nothing, because they get goods or services essentially at the same time as the money leaves.
Subsequent New Value
If you keep shipping products or performing work after payment has been received, that later offsets your exposure. Vendors who stay loyal to a failing customer usually have the strongest position in the case.
The Code also bars suits below certain minimum thresholds, which dispose of smaller claims outright.
The Trustee Has Homework to Do Before Suing
Congress amended § 547(b) in 2019 to require trustees to bring preferential actions based on reasonable due diligence, taking into account defenses they know about or could reasonably discover. Courts have not treated this as a significant barrier. Rulings from 2026 onwards continue to hold that a pleading with plausible facts on each element survives dismissal.
It still matters to you. A demand letter, answered with real payment and shipping records, puts your defense on the trustee’s desk before the complaint is drafted. Silence will get you named in an adversary proceeding.
Two Deadlines Worth Knowing
The trustee usually has two years from the date of the order to file for relief. That’s why demand letters often cluster near the two-year mark, with a discount for settling quickly attached.
The venue also cuts in favor of the creditor more often than people expect. Small preference claims must be brought to where you are located, and not wherever the bankruptcy case is sitting. A Milwaukee supplier is not automatically stuck defending in Delaware.
Ignoring the paperwork is a mistake with no fix. Default judgments in adversary proceedings are entered, and they are collected.
Put Your Payment History in Front of a Lawyer Before You Respond
Most preference claims get negotiated down or defeated in records the creditor already has. The work is organized before you say anything, so the trustee can use it.
The Milwaukee bankruptcy and litigation attorneys at Kerkman & Dunn have handled every phase of the reorganization and trial process, including appeals, and are equally willing to resolve a claim through negotiation when that serves your interests better than a courtroom. Schedule a consultation today.
