Trade creditors that deal with financially distressed customers headed toward bankruptcy face not only a risk of nonpayment, but the additional risk that payments received within 90 days of the bankruptcy filing may be clawed back as a preference. However, the U.S. Bankruptcy Code mitigates preference risk by providing several defenses to a preference claim.
One of the more prominent defenses is the subsequent new value defense under Section 547(c)(4) of the Bankruptcy Code. The new value defense reduces a creditor’s preference liability dollar-for-dollar by the amount of any new value (e.g., goods sold on credit) the creditor had provided to the debtor prepetition after receiving a preference payment.
