A financially distressed customer’s request for trade credit is a tough ask for a creditor to accept in light of the significant risk of nonpayment. That ask is made even tougher as the customer is approaching bankruptcy where a creditor is facing—in addition to the risk of nonpayment—an increased risk that, even if the customer does make payments to the creditor, the payments prior to bankruptcy may later be clawed back as a preference.

The Bankruptcy Code prescribes several defenses to mitigate preference risk. Notably, the “subsequent new value” defense grants a creditor a dollar-for-dollar reduction in preference exposure where the creditor had provided new value in the form of goods sold and/or services provided on credit terms to the debtor after receiving an alleged preference payment.

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