Preference Payments: Can the Trustee Claw Back What You Paid Your MCA Funder?

A payment made before bankruptcy can be examined even where the business owed the money and meant to pay it. Preference law concerns the effect of a transfer inside the creditor distribution system, and a recent MCA debit is not recoverable because it falls inside the review period.

Most owners describe these payments as the responsible ones. I understand why that memory stings when a trustee letter questions them.

The trustee must establish five statutory conditions, the creditor may invoke defined defenses, and the recovered funds belong to the estate rather than to any single party. The sections below follow that order.

The Five Conditions the Trustee Must Establish

Section 547(b) permits avoidance of transfers involving a creditor, a debt from before the transfer, insolvency at the time, timing inside the statutory window, and a recovery larger than the specified Chapter 7 comparison would allow. The full text of Section 547 of the Bankruptcy Code states each condition with its qualifications, and the date alone cannot establish the claim.

The ordinary window is the ninety days before the petition, with a longer period reaching transfers where an insider benefited under the stated conditions. Whether a party counts as an insider requires legal analysis. A guaranty does not extend every payment exposure by itself, though the analysis runs longer where an insider benefited.

For an MCA arrangement, the character of the transaction can decide whether the transfer involved property of the debtor applied to a debt from before. A purchase label on the agreement does not resolve that question. Neither does the description the business gave each withdrawal in its own books.

Ninety debits in ninety days present a pattern the trustee can read at a glance, while a single wire through a broker account may need tracing before anyone knows whose claim shrank. Counsel and the trustee need the agreements beside the payment records. That is why the spreadsheet needs a column for the legal basis beside the column for the amount.

Defenses for Recurring Debits

A debit that arrived every weekday feels immune from review because routine resembles innocence. The statute contains an ordinary course defense, but its conditions must be established with evidence.

Gather and preserve the history preceding the review period with the challenged transfers. A restaurant paid the same amount every weekday for eight months, then doubled the debit under threat before filing. The history helped the defense, while the final week supplied the trustee exhibit.

The statute also recognizes a contemporaneous exchange defense under specified conditions and a subsequent new value defense. Fresh funds advanced after a payment can require analysis, though an obligation substituted for an old one is not new value by renaming. For a renewal, counsel separates the new cash from the amount that retired an earlier balance, since a headline advance can overstate the value supplied at that stage.

The burden divides by subsection. The trustee proves avoidability, while the party asserting protection carries the burden on the defense. The spreadsheet helps, though a spreadsheet never carried a hearing by itself. Section 547 further calls for reasonable due diligence toward known or reasonably knowable defenses, which rewards the owner whose records were already in the file.

An owner may favor one creditor before filing in order to preserve a relationship the business still needs. Resist the urge to reconstruct that history from memory. The bank description may name a processor rather than the creditor whose claim shrank, so preserve the ledger entry with the transfer details beside each line. Opposing counsel tends to open with the bank records rather than the agreement.

Insolvency and the Distribution Comparison

In the ninety days before filing, insolvency is presumed. The presumption belongs to the legal framework, and balance sheets with other records may still matter.

The question was never whether the debt was real. A fully secured creditor presents different issues from one holding no collateral, and counsel must trace and sort each transfer to its recipient before the comparison can run.

The preference period works the way a tide line works on a bulkhead: everything below it gets examined, whether the water placed it there or the owner did. The results can look outlandish beside the equities, with the responsible payer funding the estate while the aggressive collector keeps its collateral. The payment was proper. The Code may still recover it.

Small transfers carry a defined shield in business cases. The statute protects transfers beneath a base amount subject to adjustment, reported at $8,575 effective in 2025, applied across the relevant aggregate as counsel determines on the actual series. The improvement in position test for collateral that floats with receivables is a question for counsel on the full file, and this page does not resolve it.

Where Recovered Funds Go

Preference recovery belongs to the bankruptcy estate for administration among creditors. An owner should not budget the disputed amount as personal cash or assume it returns to the operating account for unrestricted use.

The amount demanded and the amount recovered often differ, since a claim can be contested or resolved under the procedures of the case. Whether that pattern holds outside the districts where these cases crowd the docket is a question I cannot answer from this desk. Distribution follows the Code.

Payments Before a Settlement Agreement

Rarely does a trustee chase a single small debit without reading the full history. The same history should be read before the business commits to a private settlement, since a lump sum paid to one creditor is a different matter from a plan that addresses several obligations.

Delancey Street is a debt settlement company that discusses negotiation of business obligations. Where bankruptcy remains under consideration, a bankruptcy attorney should review proposed payments before the business commits. The Chapter 7 guide from the federal courts describes these trustee powers.

You paid the money because the money was owed. That fact explains the payment without protecting it. Ensure that any proposed settlement names its source of funds with the obligations it resolves in writing. Ensure also that payment records survive the closing of the account, since a trustee letter dated in late December can reopen a summer the owner believed was settled. The debit was ordinary. The system that reviews it is not.

The trustee does not punish payment. The trustee redistributes it.

Preference law asks how a transfer affected the collective process, and consultation with Delancey Street is where the private part of that assessment begins, while independent counsel judges what the estate might reclaim against the claims still pressed in the case.