Understanding the “Subsequent New Value” Defense in Bankruptcy

When a business files for bankruptcy, payments made to creditors during the 90 days prior to filing come under scrutiny. Bankruptcy trustees or debtors in possession may seek to “claw back” these payments — known as “preferences” — to ensure fair treatment of all creditors. However, the Bankruptcy Code protects vendors who continue working with financially troubled companies and offers them certain protections. One of these is the “subsequent new value” defense.

Under 11 U.S.C. § 547(c)(4), the subsequent new value defense allows a creditor to shield itself from liability. In simple terms, if a vendor receives a payment that might later be challenged as a preference, but then continues to extend goods or services on credit, the value of those additional deliveries reduces or eliminates the vendor’s liability for the earlier payment. 

The subsequent new value defense encourages vendors to continue supplying a distressed company without fear of preference claims. The defense incentivizes vendors to keep doing business, which can help a debtor survive—or at least ensure an orderly wind-down.

To qualify as new value, the goods or services must benefit the bankruptcy estate, not be secured by later-avoided liens and not be repaid by another avoidable transfer. Qualifying new value includes:

• Goods delivered or shipped after the contested payment
• Services rendered after the payment
• Any other unsecured credit advanced to the debtor that benefits the estate

Timing is also critical. The new value must be provided after the preference payment and before the bankruptcy filing. Courts may differ on whether this new value must remain unpaid at the time of filing, so both creditors and debtors should review local rules with an experienced bankruptcy attorney.

For creditors, the subsequent new value defense can dramatically reduce exposure in preference lawsuits. For example, if a vendor receives a $100,000 payment but subsequently provides $80,000 in goods on credit that remain unpaid, that $80,000 can offset the earlier payment, thereby lowering or erasing potential liability.

For debtors and trustees, evaluating the defense is essential before pursuing preference claims. Accurate records and a clear understanding of transaction timing are vital to determine if a claim is worth pursuing or litigating. can protect their interests.

The Law Offices of Michael Jay Berger in Beverly Hills represents California debtors and creditors in Chapter 11 bankruptcy cases. Call us at 310-271-6223 or contact us online to arrange a consultation.