Navigating Preference Claims as a Creditor in Business Bankruptcy
May 23, 2025
When a business declares bankruptcy, creditors often face legal complications. Among the most common and often unexpected hurdles are preference claims, which can leave creditors feeling caught off guard and uncertain about their next steps.
Preference claims are legal disputes in which a bankruptcy trustee or debtor in possession attempts to recover payments made to creditors within a specific time frame prior to the bankruptcy filing.
These payments are viewed as unfair advantages to certain creditors at the expense of others. For businesses trying to reclaim what they are owed, these claims can feel overwhelming.
If you are a creditor concerned about a potential preference claim, it's important to consult legal counsel to protect your financial interests. At Vivona Pandurangi, PLC, we understand that these situations can be frustrating. Based in Falls Church, Virginia, we serve clients across Northern Virginia, including Alexandria, Arlington, Fairfax, Manassas, Prince William, and Loudoun.
In this blog, we provide an overview of preference claims and thoughtful strategies to help protect your interests during bankruptcy.
What Is a Preference Claim?
A preference claim refers to a situation where a trustee or debtor alleges that a creditor received an unfair payment within a specified period preceding the bankruptcy filing.
The goal of these claims is to maintain fairness by equitably redistributing assets among creditors. However, defending against such claims can be difficult, especially in cases where creditors acted in good faith or provided valuable consideration for the payments received.
Preference claims typically involve two important time frames, which are dictated by federal bankruptcy law:
90-day rule: Any payment made to a creditor within 90 days before the debtor’s bankruptcy filing can be subject to clawback under the presumption of unfair preference.
One-year rule for insiders: For “insiders” such as company executives, family members of the debtor, or business partners, this window extends to one year.
Even if you received payment in good faith, Virginia's bankruptcy law often demands proof that your actions complied with the established bankruptcy requirements.
Defenses Against Preference Claims
Receiving a preference claim notice does not automatically mean you’ll lose the payment in question. There are various defenses creditors can use to dispute or mitigate a preference claim. Some common defenses under the Virginia Bankruptcy Code include:
Ordinary course of business defense: If the payment occurred during ordinary business dealings between you and the debtor, it may not be considered preferential.
New value defense: If you provided additional goods or services after receiving the payment, this could offset the alleged preferential transfer.
Contemporaneous exchange: Payments that are considered a simultaneous exchange for goods or services may not qualify as preferential.
Understanding these defenses and leveraging them strategically requires a careful analysis of the specific details of your case. Filing the necessary pleadings, gathering evidence, and negotiating outcomes are all tasks that demand legal knowledge and diligence.
Virginia Laws and Your Role as a Creditor
Virginia adheres to federal bankruptcy laws but also has specific provisions for handling insolvency and payments considered preferential. The state follows the Uniform Commercial Code (UCC), which often intersects with bankruptcy statutes.
For instance, creditors who have a perfected security interest in property may have priority over general unsecured creditors in recovering funds. It's important for creditors to recognize that Virginia courts will consider both federal guidelines and state-level protections when determining whether a payment was preferential.
How to Be Proactive in Protecting Your Business
Businesses can safeguard themselves against future preference claims by adopting preventive measures. Some strategies you can consider as part of your approach to working with clients or businesses on the brink of financial trouble include the following.
Draft contracts with clear terms: Legally binding agreements provide documentation to support any payments made and received in good faith.
Monitor payment patterns: Keep an eye on any irregular or unusually large payments from your clients that may appear suspicious in retrospect.
Secure your interests: Filing a UCC-1 financing statement or perfecting a lien can give you the legal standing to claim assets that are not subject to clawback.
Document everything: Maintain detailed records, including invoices, receipts, and correspondence, to build a strong defense in case of preference claims.
Bankruptcy Attorneys in Falls Church and Alexandria
If you've received a preference claim due to a bankruptcy filing in Virginia, it's important to take these matters seriously and consult an experienced bankruptcy attorney as soon as possible.
At Vivona Pandurangi, PLC, we strive to make high-quality legal assistance more accessible and cost-effective. Our goal is to reduce legal complications, minimize costs, and streamline the process as much as possible. Whether it’s protecting creditors’ rights or defending against preference claims, our experienced attorneys will help you achieve the best possible outcome.
With offices in Falls Church and Alexandria, Virginia, we serve clients throughout Arlington, Fairfax, Manassas, Prince William, and Loudoun. Reach out today to schedule a consultation.