By: Phillip Wang, Esq.

Creditors often find themselves navigating complex legal terrain when a client or customer files for bankruptcy, especially when it comes to defending against preference claims. One recurring question is whether payments made under an agreed-upon payment schedule are considered preferential. At Strategy Law, our Bankruptcy and Creditors’ Rights attorneys are here to clarify how courts view these situations and what defenses may be available.

Are Agreed-Upon Payment Plans Always Preferential?

If a debtor falls behind on payments and later agrees to a structured payment schedule, such as through a stipulation or settlement, those payments can still be considered preferential. Courts often view such arrangements as signs of financial distress and unusual collection activity, which can make them ineligible for the ordinary course of business defense.

However, the treatment of these payment plans varies by jurisdiction:

• Third Circuit (e.g., Pennsylvania, New Jersey, Delaware): Disfavors payment plans. The court noted that such arrangements resemble reactive measures to a failing relationship rather than typical business practices.

• Second Circuit (e.g., New York, Connecticut): More lenient. The court recognized that if a payment plan aligns with industry norms, it could still qualify under the ordinary course exception.

Key Takeaway: Creditors must be prepared to show that any modified payment terms are consistent with past dealings or standards within the industry.

 

The Presumption of Insolvency: A Built-in Hurdle
 

Under Section 547(f) of the Bankruptcy Code, the debtor is presumed to be insolvent during the 90 days before filing for bankruptcy. This means the trustee does not need to prove insolvency unless the creditor rebuts the presumption.

That said, the burden of proof ultimately remains on the trustee, even if the creditor must provide some evidence to challenge the presumption.

 

Defining Insolvency: Going Concern or Liquidation?
 

The Bankruptcy Code defines insolvency as when debts exceed assets at fair valuation (Section 101(32)(A)). But what does “fair valuation” mean in practice?

• Some courts apply a going-concern standard (business expected to continue operations).

• Others lean toward a liquidation standard (assets sold off quickly).

Given these nuances, creditors often rely on financial experts or accountants to assess a debtor’s true financial condition leading up to the bankruptcy. Requesting discovery on this issue can slow down a preference case or help in negotiating a better settlement.

Statute of Limitations: Know Your Window
 

Creditors should also be aware of the statute of limitations for preference actions under Section 546(a):

• The trustee generally has 2 years from the date of the bankruptcy filing to bring a preference claim.

• If a trustee is appointed later, the deadline may extend to 1 year after the trustee’s appointment.

After that, the claim should be barred by this statute of limitations. 

Conclusion
When faced with preference actions, creditors need experienced legal guidance to preserve their rights and reduce financial exposure. At Strategy Law, our Bankruptcy and Creditors’ Rights attorneys understand these claims and defenses and are ready to help you protect your interests.

Contact us today to learn how we can help you build a strong defense against preference claims and navigate bankruptcy proceedings with confidence.

This blog is written as of July, 2025.  Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.

All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations.  No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.