Defending Illinois Bankruptcy Preference Claims

## Why a Paid Invoice Can Be Challenged

A bankruptcy trustee or debtor in possession may seek to recover certain transfers made before a bankruptcy filing as preferences. The purpose is generally to prevent one creditor from receiving more than similarly situated creditors during the debtor's slide into bankruptcy. A preference demand does not necessarily accuse the recipient of misconduct; ordinary payments can satisfy the initial statutory elements.

The claimant generally examines transfers to or for a creditor, on account of antecedent debt, made while the debtor was insolvent, within the applicable lookback period, that enabled the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation. The standard period is usually 90 days before filing, while transfers involving insiders may receive a longer lookback.

## Ordinary-Course Defense

A creditor may defend a transfer made in the ordinary course of business or financial affairs of the debtor and creditor, or according to ordinary business terms. The subjective inquiry compares preference-period payments with the parties' historical relationship. Relevant details include invoice-to-payment timing, payment method, amount, collection pressure, partial payments, and deviations from prior practice.

The objective component considers practices in the relevant industry. A creditor should not rely on a bare assertion that late payments are common. Depending on the dispute, expert or industry evidence may be useful.

Creating a payment spreadsheet is often the most effective first step. It should calculate days-to-pay for the historical and preference periods, identify outliers, and link each payment to invoices and communications.

## New Value and Contemporaneous Exchange

The subsequent-new-value defense can reduce exposure when the creditor supplied new goods or services after receiving a challenged payment. Application depends on the sequence of transfers and the statutory requirements. Build a running ledger that pairs payments with later invoices, shipments, delivery records, and credits.

The contemporaneous-exchange defense may protect a transfer intended and in fact made as a substantially contemporaneous exchange for new value. Cash-on-delivery transactions are a common example, but contract terms, invoice timing, and actual performance control. Other defenses may apply to secured claims, statutory liens, domestic-support obligations, and particular protected transfers.

## Responding to a Demand

Do not evaluate a demand solely by comparing its total with bank deposits. Confirm the correct debtor, transfer dates, check-clearance dates, refunds, duplicate entries, and whether payments belonged to another entity. Preserve contracts, invoices, checks, ACH details, account statements, shipping records, emails, and collection notes.

Settlement analysis should include available defenses, litigation cost, venue, evidentiary gaps, and the claimant's authority. Preference actions filed in Illinois remain governed by federal bankruptcy law, procedural rules, and controlling precedent.

## Practical Takeaways

Credit departments should retain payment and shipment data before any customer bankruptcy occurs. Abruptly changing payment terms or applying unusual collection pressure during financial distress can weaken an ordinary-course defense, though continuing unsecured credit carries its own risk.

After receiving a demand, calendar the response and limitations dates, request the claimant's transaction detail, and perform a transfer-by-transfer analysis. Avoid making admissions in an informal response before reviewing defenses and counterclaims.

This article provides general information, not legal advice. Preference exposure depends on the payment history, value exchanged, claim status, bankruptcy chapter, and current federal law.