Preference and Fraudulent Transfer Claims: When a Trustee Claws Back What You Were Paid

Summary. Getting paid by a customer who later files bankruptcy is not the end of the story, and a demand letter arriving two years later asking for the money back catches most businesses by surprise. Preference law lets a trustee recover payments made in the ninety days before a filing so similarly situated creditors share equally; fraudulent transfer law reaches back much further to undo transfers that were evasive or simply not paid for. This article explains the elements of both, works the defenses in the order a defendant should assert them, and covers who can be sued and which transferees escape. It also addresses the transactions that generate the largest claims — leveraged buyouts, upstream guaranties, dividends, and Ponzi payouts — and the records that make these cases cheap to defend.

The letter arrives eighteen months after you had written the account off as a happy ending. Your customer went under, but you had pushed hard, gotten current, and collected $214,000 in the three months before the filing. Now a trustee's counsel writes that those payments were preferential and demands return of the full amount, offering to settle for sixty cents on the dollar if you respond within thirty days.

This feels like a shakedown, and defendants say so constantly. It is not. Preference law exists to stop the race to the courthouse. If the creditors who yell loudest in the final months get paid in full while everyone else gets nothing, then the rational strategy for every creditor of a struggling company is to squeeze immediately — which is precisely what destroys companies that might otherwise have been saved. Equality of distribution among similarly situated creditors is the policy, and the ninety-day look-back is the mechanism.

Understanding that policy is also the key to defending these cases, because the statutory defenses are all built around it. A creditor who did not win the race — who was paid in the ordinary way, on ordinary terms, or who gave the debtor something of value in exchange — is not the target and has a defense that fits.

Preferences under § 547

The elements. Under 11 U.S.C. § 547(b), the trustee may avoid a transfer of an interest of the debtor in property:

1. To or for the benefit of a creditor;
2. For or on account of an antecedent debt owed before the transfer was made;
3. Made while the debtor was insolvent;
4. Made within ninety days before the petition date, or within one year if the creditor was an insider; and
5. That enables the creditor to receive more than it would in a Chapter 7 liquidation had the transfer not been made.

No intent required, by anyone. The debtor need not have intended a preference; the creditor need not have known anything. That surprises defendants and it is the source of the sense of unfairness. Preference liability is strict, subject to defenses.

Element by element, where the fights are.

"An interest of the debtor in property." Payments from a third party's funds are not preferences — the classic example being a payment made directly by a guarantor. But the "earmarking doctrine" applies only where new funds are genuinely earmarked by a new lender for a specific old creditor, with the debtor exercising no control. Money that passes through the debtor's operating account is generally the debtor's.

"Antecedent debt." A debt incurred before the transfer. This element separates preferences from contemporaneous exchanges. For payments by check, Barnhill v. Johnson, 503 U.S. 393 (1992), holds the transfer occurs when the check is honored by the drawee bank, not when delivered — which matters for a check delivered on day 91 and cashed on day 89.

Insolvency. Section 547(f) presumes the debtor was insolvent during the ninety days before filing. The presumption is rebuttable, but rebutting it requires a balance-sheet insolvency analysis, which is expensive and rarely successful for a company that filed bankruptcy three months later. For insider transfers in the ninety-day-to-one-year window, the trustee must prove insolvency — a real burden and often the best defense in an insider case.

The hypothetical Chapter 7 test. The creditor must have received more than it would have in a liquidation. The practical consequence: a fully secured creditor with adequate collateral cannot be preferenced, because it would have been paid in full anyway. Conversely, in a case where unsecured creditors will receive nothing, any payment to an unsecured creditor satisfies this element. Since most Chapter 7 estates pay unsecured creditors little or nothing, this element is usually a formality.

"Insider" is defined in § 101(31) and includes directors, officers, controlling persons, general partners, relatives, and affiliates — plus, in most circuits, non-statutory insiders whose relationship with the debtor is close enough that transactions are not at arm's length. Insider status extends the reach-back to a year and removes the insolvency presumption for the earlier portion.

The defenses, in the order you should raise them

Section 547(c) supplies the affirmative defenses, and the burden is on the creditor under § 547(g).

1. Subsequent new value — § 547(c)(4)

Start here. For every preferential payment, the creditor may offset the value of new goods or services shipped afterward that were not themselves paid for by an otherwise unavoidable transfer.

Why it comes first. A supplier that keeps shipping after each payment can often reduce exposure to nearly nothing without proving anything about industry norms or ordinary practice. It is arithmetic, not judgment. Build a preference exposure spreadsheet: every payment in the ninety-day window, every shipment, in date order, with running new value.

Two circuit splits worth flagging: whether new value must remain unpaid as of the petition date (most circuits say it need not, so long as it was not paid by an otherwise avoidable transfer), and whether new value can be applied to payments that preceded it in an unrestricted rolling fashion. Know your circuit's rule before valuing the case.

2. Ordinary course of business — § 547(c)(2)

A transfer is protected if the debt was incurred in the ordinary course of business or financial affairs of both parties and the payment was either:

• (A) made in the ordinary course of business or financial affairs of the debtor and the transferee — the subjective test; or
• (B) made according to ordinary business terms — the objective test, measured by industry practice.

Note the disjunctive "or," added in 2005 and still misunderstood. A creditor need satisfy only one prong.

The subjective test compares the payments at issue to the parties' own historical course of dealing. Courts look at timing (days from invoice to payment, compared to a baseline period), amount, form of payment, whether unusual collection activity preceded the payment, and whether the terms changed. The single most damaging fact is a change in behavior: payments that went from 45 days to 15 days, a switch from check to wire, a payment made after a demand letter, or a new requirement of cash in advance for continued shipment.

Union Bank v. Wolas, 502 U.S. 151 (1991), confirmed that the defense applies to payments on long-term debt, not merely trade credit — an important holding for lenders.

The objective test requires evidence of industry norms, usually through a declaration from someone with industry experience or through published data. Courts have generally read "ordinary business terms" to encompass a broad range rather than a narrow median.

3. Contemporaneous exchange for new value — § 547(c)(1)

Protects a transfer intended by both parties to be a contemporaneous exchange for new value and that was in fact substantially contemporaneous. This is the cash-on-delivery defense, and it covers a supplier who converted a customer to C.O.D. terms partway through the window — as to shipments actually paid for at delivery. Document the intent contemporaneously; the parties' subjective intent is an element.

4. Purchase-money security interest — § 547(c)(3)

A security interest securing new value given to enable the debtor to acquire property, perfected within thirty days after the debtor receives possession, is protected. Missing the thirty-day window converts a PMSI into an avoidable preference — one of the cleanest and most avoidable losses in secured lending.

5. Floating liens on inventory and receivables — § 547(c)(5)

Protects a security interest in inventory, receivables, or proceeds except to the extent the creditor improved its position during the ninety-day period as measured by the two-point net improvement test. A revolving lender that was undersecured by $2 million ninety days out and undersecured by $500,000 at filing has a $1.5 million preference problem.

6. Statutory liens, domestic support, and small transfers — § 547(c)(6)–(9)

Statutory liens not avoidable under § 545; domestic support obligations; consumer transfers under a small dollar threshold; and non-consumer transfers aggregating less than a statutory amount (adjusted every three years and currently in the mid-four figures). The small-transfer defense disposes of a meaningful share of the demand letters that go out in bulk.

7. The 2019 due-diligence requirement

The Small Business Reorganization Act amended § 547(b) to require that the trustee bring an avoidance action "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses." Courts have split on whether this is an element the trustee must plead or an affirmative defense, but it has practical teeth: respond to the demand letter with your defenses, in writing, with documentation. Doing so makes the defenses "known," and courts have dismissed or sanctioned actions filed in the face of a documented, dispositive response.

The same legislation raised the venue threshold: a proceeding to recover a non-consumer debt below a statutory amount must be brought in the district where the defendant resides. Small demands can no longer be leveraged by the cost of defending in a distant forum.

Fraudulent transfers

Preference law is about timing and equality. Fraudulent transfer law is about whether the estate got anything for what it gave up.

Two statutory routes.

• 11 U.S.C. § 548 — federal, with a two-year reach-back from the petition date.
• 11 U.S.C. § 544(b) — the trustee steps into the shoes of an actual unsecured creditor who could have avoided the transfer under state law, importing the state's longer reach-back. Under the Uniform Voidable Transactions Act (the successor to the UFTA, adopted in most states) that is generally four years, or one year after discovery for actual-fraud claims. Some states are longer, and the Internal Revenue Service as a triggering creditor can supply a ten-year federal collection period in the circuits that permit it — a theory that has produced very large recoveries.

Actual fraudulent transfer

A transfer made with actual intent to hinder, delay, or defraud creditors. Intent is proved by circumstantial evidence, the traditional badges of fraud:

• The transfer was to an insider.
• The debtor retained possession or control after the transfer.
• The transfer was concealed.
• The debtor had been sued or threatened with suit before the transfer.
• The transfer was of substantially all the debtor's assets.
• The debtor absconded or removed assets.
• The value received was not reasonably equivalent.
• The debtor was insolvent or became so shortly after.
• The transfer occurred shortly before or after a substantial debt was incurred.
• The debtor transferred essential assets to a lienor who then transferred them to an insider.

No single badge decides it. Courts weigh the constellation. Three or four strong badges will usually get a complaint past a motion to dismiss, and Rule 9(b)'s particularity requirement applies to actual-fraud claims in most circuits, though courts relax it for trustees pleading on information and belief about a debtor's affairs.

The Ponzi scheme presumption. Where the debtor operated a Ponzi scheme, most courts presume actual intent as a matter of law for transfers made in furtherance of the scheme. Investors who received "profits" above their principal are routinely required to return them; those who received only their principal typically have a good-faith-for-value defense as to that amount.

Constructive fraudulent transfer

No intent required. The trustee must show that the debtor received less than reasonably equivalent value and that one of three financial conditions existed:

• The debtor was insolvent at the time or became insolvent as a result;
• The debtor was left with unreasonably small capital for the business in which it was engaged; or
• The debtor intended to incur, or believed it would incur, debts beyond its ability to pay as they matured.

Reasonably equivalent value is the litigated concept. It is not a precise mathematical equivalence but a fact question about what the debtor gave and got. BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), held that the price obtained at a regularly conducted, noncollusive foreclosure sale conclusively constitutes reasonably equivalent value for real property — foreclosure sales are not fraudulent transfers merely because the price was low. Courts have generally declined to extend BFP to tax sales in all circumstances and to UCC Article 9 dispositions.

Indirect benefit. A transfer that benefits the debtor indirectly can supply value — a subsidiary that guarantees a parent's loan may receive value if the loan funds flow down. But the benefit must be real and traceable. In re TOUSA, Inc., 680 F.3d 1298 (11th Cir. 2012), avoided liens granted by subsidiaries that guaranteed a parent-level settlement obligation, finding the asserted indirect benefits (avoiding a bankruptcy, preserving relationships) too speculative, and it also rejected the "savings clause" that purported to cap each guarantor's obligation at the maximum amount not constituting a fraudulent transfer. Savings clauses are still drafted; nobody should rely on them.

Self-settled trusts. Section 548(e) supplies a ten-year reach-back for transfers to a self-settled trust or similar device made with actual intent to hinder, delay, or defraud. This is the provision that limits domestic asset protection trusts as a pre-bankruptcy strategy.

The transactions that generate big claims

Leveraged buyouts. The classic theory: the target's assets secure debt used to pay the target's selling shareholders, so the company incurs an obligation and receives nothing. Whether the LBO is avoidable turns on solvency and capital adequacy at closing, which turns on the projections and the valuation — hence the solvency opinion, the due diligence file, and the fight among experts years later. Note Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. 366 (2018), which held that the § 546(e) securities safe harbor is evaluated by reference to the overarching transfer the trustee seeks to avoid, not to component transfers passing through financial institutions acting as conduits. That decision meaningfully narrowed the safe harbor for private-company LBOs, though the Court expressly left open the effect of the "customer" language, which litigants continue to press.

Dividends and redemptions. Distributions to owners while a company is insolvent or thinly capitalized. These are often the most straightforward constructive-fraud claims, because the company plainly received nothing.

Upstream and cross-stream guaranties. Common in credit facilities across an affiliate group; each guarantor must have received value.

Insider compensation. Salary and bonuses above reasonable value during the insolvency period.

Transfers to family. The house transferred to a spouse for $1 while a lawsuit was pending is the textbook case, and it is the most common one in practice.

Who can be sued, and who escapes

11 U.S.C. § 550 governs recovery once a transfer is avoided.

The trustee may recover from:

• the initial transferee;
• the entity for whose benefit the transfer was made; or
• any immediate or mediate transferee of the initial transferee.

The mere conduit doctrine. An "initial transferee" must have dominion and control over the funds — the right to use them for its own purposes. A bank that processes a wire, an escrow agent, and a payment processor are generally conduits, not transferees. The analysis is functional; a party that could have used the money for itself is a transferee even if it did not.

The § 550(b) defense for subsequent transferees. A trustee may not recover from a subsequent transferee who took for value, in good faith, and without knowledge of the voidability of the transfer, nor from any transferee after such a person. Note that this defense is not available to the initial transferee, which is why the conduit question matters so much.

Good faith and value under § 548(c). A transferee that takes for value and in good faith may retain the transfer to the extent of the value given. Good faith is evaluated objectively in most circuits: a transferee on inquiry notice of the debtor's insolvency or of the fraudulent purpose who fails to investigate does not have it.

Benefit-transferee liability and Deprizio. Where a payment to a lender also benefits an insider guarantor, the insider is an entity "for whose benefit" the transfer was made. Congress addressed the resulting one-year exposure for the outside lender in § 550(c), which bars recovery from a non-insider transferee for transfers made between ninety days and one year before filing. The insider guarantor remains exposed.

Section 502(d) is the enforcement mechanism nobody expects: the court shall disallow any claim of an entity from which property is recoverable until it turns the property over. A creditor with a $2 million claim and a $200,000 preference has its entire claim disallowed until the preference is paid.

Section 502(h) is the offsetting comfort: a creditor that returns a preference gets an allowed unsecured claim for the amount returned, as though the transfer had never been made. In a case paying twenty cents, returning $100,000 buys a claim worth $20,000.

Deadlines

• § 546(a): an avoidance action must be commenced within two years after the order for relief, or one year after the appointment of a trustee if that occurs within the two years, and in no event after the case is closed or dismissed. Tolling agreements are common and enforceable.
• State-law limitations imported through § 544(b) are measured from the transfer, not from the petition, and vary.
• Demand letters are not filings and do not toll anything.

Defending a preference demand, step by step

On receipt of the letter — before anyone panics.

1. Verify the numbers. Trustees frequently work from the debtor's check register without accounting for returned checks, credits, offsets, or payments that were actually made by an affiliate. A meaningful percentage of demands are simply wrong on the arithmetic.
2. Confirm the petition date and count ninety days backward using the honor date for checks.
3. Pull the full transaction history for at least twelve months before the ninety-day window, and preferably two years. The baseline period is the heart of the ordinary course defense, and you cannot construct it later.
4. Build the new value schedule. Every invoice, every shipment, every payment, in date order.
5. Check whether the aggregate is below the statutory small-transfer floor and whether venue is proper in your district.
6. Determine whether you were secured and whether you were fully secured. A perfected, fully secured creditor generally has no preference exposure.

Respond in writing. A substantive response with documentation does three things: it satisfies the "known or reasonably knowable" language of the 2019 amendment; it usually produces a much better settlement; and it establishes a record if the trustee sues anyway. Include the payment history, the new value schedule, the baseline days-to-pay analysis, and any documents showing the terms never changed.

Evaluate settlement honestly. Trustees are economically rational actors with limited estate funds. A defendant with a documented new-value and ordinary-course position frequently settles at ten to twenty cents on the demand, or nothing. A defendant who ignored the letter and has no records settles much higher, because the trustee's downside is small and the defendant's litigation cost exceeds the demand.

Litigation posture. These are adversary proceedings in bankruptcy court. Consider whether you have a jury trial right and whether you have waived it by filing a proof of claim — filing a claim generally submits the creditor to the equitable jurisdiction of the bankruptcy court for claims-allowance purposes, and courts have found that this waives a jury right on preference claims. That is a real strategic cost of filing a claim in a case where you also expect a preference demand, and it should be weighed rather than defaulted.

Prevention

The single best defense is built years before the bankruptcy.

• Do not change payment terms during a customer's decline. The instinct to demand shorter terms, to require wires instead of checks, or to hold shipments until payment is exactly what destroys the ordinary course defense. If the risk is real, the better answers are a purchase-money security interest (perfected within thirty days), a letter of credit, a guaranty from a solvent affiliate, or credit insurance — none of which is preferential.
• If you convert to cash in advance or C.O.D., do it cleanly and document the intent, so that § 547(c)(1) applies to the shipments.
• Keep shipping if you can do so safely. New value is the cheapest defense in the statute.
• Perfect security interests immediately and monitor lapse dates. An unperfected lien is avoidable under § 544 regardless of anyone's good faith.
• Maintain payment records in a form that can produce a days-to-pay analysis. Most preference defenses are won or lost on whether the defendant can produce a clean two-year history in a week.
• For transactions, not just trade credit: obtain a solvency opinion for any leveraged transaction, document the value received by each obligor including subsidiaries granting upstream guaranties, and preserve the projections and the board's deliberations. A defensible contemporaneous record is worth more than any savings clause.
• For owners: do not make distributions, repay shareholder loans, or transfer assets to family while the company is insolvent. The one-year insider reach-back and the four-year state-law reach-back make these the easiest recoveries a trustee will ever get, and they can also support a denial of discharge or a claim against the recipients personally.

The way to think about it

The uncomfortable part of this area is that it punishes creditors who did nothing wrong. A supplier that extended credit in good faith, was paid what it was owed, and provided goods worth every dollar can still be required to give the money back. That is not an accident or a drafting error. It is the price of a system that distributes a failed company's assets by rule rather than by who was most aggressive, and the alternative — a first-to-collect regime — would be worse for the same supplier in the ten cases where it was not the fastest.

The practical takeaway is that preference exposure is a normal cost of extending trade credit, and it is manageable. A business that keeps clean records, resists the urge to change terms when a customer weakens, keeps shipping where it safely can, and perfects its security interests will pay very little of what gets demanded. A business that does none of those things will write checks it does not need to write, eighteen months after it thought the matter was closed.

A worked preference calculation

Numbers make the defenses concrete. Assume a components supplier, ninety-day window, petition filed 1 October.

Gross preference exposure: $214,000.

Subsequent new value. Following each payment, the supplier shipped $45,000, $52,000, and $18,000 — $115,000 of new value, none of it paid for by a later transfer within the window under the circuit's rule. Exposure drops to $99,000 on arithmetic alone.

Ordinary course. Over the preceding two years, the debtor paid this supplier on an average of 41 days from invoice, by check, with a range of 33 to 52 days. Three of the four window payments fell at 38, 44, and 40 days, by check, with no dunning correspondence. Those payments — $60,000, $70,000, and $50,000 — are defensible under the subjective prong. The 18 September payment came at 19 days, by wire, three days after a collection call. That one is exposed.

Where it lands. After applying new value to the earliest payments and setting aside the three ordinary-course payments, the realistic exposure is the September wire, less any remaining new value — perhaps $16,000 against a $214,000 demand. A supplier who produced that analysis in response to the demand letter would likely settle for a nominal amount or nothing. A supplier who ignored the letter would be litigating over $214,000.

Note what did the work: records the supplier already had, organized in a spreadsheet, and the discipline of not having changed terms until the very end. The September wire is exposed precisely because it was the moment the supplier won the race — which is the conduct the statute was written to reach.

State-law voidable transaction claims outside bankruptcy

Not every clawback comes from a trustee. The Uniform Voidable Transactions Act — adopted in most states, replacing the UFTA — gives an individual creditor a direct cause of action against a transferee, with no bankruptcy filing required.

What a judgment creditor can do. A creditor whose debtor transferred assets to a spouse, a new entity, or an insider can sue the transferee to avoid the transfer, to attach the asset, to obtain an injunction against further disposition, or to appoint a receiver. Remedies under UVTA § 7 include avoidance to the extent necessary to satisfy the claim, and a money judgment against the first transferee or the person for whose benefit the transfer was made under § 8.

Key differences from bankruptcy practice:

• Standing belongs to the individual creditor, and both present and, for many claims, future creditors may sue.
• The UVTA sets the standard of proof for actual intent at a preponderance of the evidence, resolving older case law that had required clear and convincing evidence in some states.
• Insolvency is presumed where the debtor is generally not paying debts as they come due.
• Limitations run four years from the transfer, or for actual-fraud claims one year after discovery, with the outer periods treated in the UVTA as extinguishing the claim rather than merely barring the remedy.
• There is no preference analogue. Outside bankruptcy, paying one creditor and not another is generally lawful, subject to state bulk-sale and assignment statutes and to any fraudulent-transfer theory the payment independently supports.

Successor liability frequently rides alongside these claims. A buyer of assets from a failing seller may inherit liabilities under the de facto merger doctrine, the mere continuation doctrine, or where the transaction was itself a fraudulent effort to escape debts — the standards vary by state and are more expansive in product liability and environmental contexts. Buyers should price that risk, and sellers' counsel should be candid that a sale for less than reasonably equivalent value invites both theories at once.

One practical footnote on insurance. Some commercial policies, and a growing number of trade credit policies, respond to preference demands, and a handful of carriers write standalone preference coverage for suppliers with concentrated customer exposure. Coverage is rarely broad and often carries a co-insurance feature, but the premium is small relative to a single large clawback. Any business whose accounts receivable are concentrated in two or three customers should at least price it, and should confirm at renewal whether the policy responds to a demand or only to a filed adversary proceeding — the distinction determines whether defense costs are covered during the phase when the case is actually resolved.

Primary authority

Avoidance litigation is almost entirely statutory, and the defenses are where the cases are won.

• 11 U.S.C. § 547 — preferences, including the § 547(b) elements, the ordinary-course, contemporaneous-exchange, and subsequent-new-value defenses in § 547(c), and the § 547(b) requirement, added in 2019, that the trustee conduct reasonable due diligence before filing.
• 11 U.S.C. § 548 — actual and constructive fraudulent transfers, and the two-year federal reach-back.
• 11 U.S.C. § 544(b) — the strong-arm provision that lets a trustee borrow a state fraudulent transfer statute and its longer limitations period.
• Uniform Voidable Transactions Act §§ 4–5 (the renamed UFTA), adopted in most states — actual intent and its badges, and constructive fraud.
• 11 U.S.C. § 550 — recovery from the initial transferee or a subsequent one, and the good-faith transferee-for-value protection.
• 11 U.S.C. § 546 — the limitations periods for avoidance actions and the safe harbors.
• 11 U.S.C. § 502(d) — a claim held by a defendant who has not returned an avoidable transfer is disallowed, which is the trustee's real leverage.
• 11 U.S.C. § 546(e) and Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. 366 (2018) — the securities safe harbor, read narrowly to focus on the transfer the trustee actually seeks to avoid rather than on intermediaries.
• Barnhill v. Johnson, 503 U.S. 393 (1992) — a check transfer occurs on honor, not delivery, which decides a surprising number of ninety-day questions.
• Union Bank v. Wolas, 502 U.S. 151 (1991) — the ordinary-course defense reaches long-term debt payments.
• Fed. R. Bankr. P. 7001 — avoidance is an adversary proceeding, not a motion.

Related articles

• Chapter 7 Liquidation and Creditors' Rights: Claims, Exemptions, and the Discharge — the case in which most of these actions are brought.
• Chapter 11 Reorganization: How a Business Restructures and What Creditors Should Expect — where avoidance actions are often preserved for a liquidating trust.
• Secured Transactions Under UCC Article 9: Attachment, Perfection, and Priority — perfection as the defense to the strong-arm power.
• Bank Loan Workouts, Forbearance, and Receiverships — restructuring without creating avoidable transfers.
• Offshore vs. Domestic Asset Protection — where § 548(e) and the badges of fraud constrain planning.
• Buying and Selling a Small Business: From Letter of Intent to Closing — solvency representations and successor risk.
• Collecting a Judgment — the state-law voidable transaction claim outside bankruptcy.
• Winding Down a Business: Dissolution, Creditors, and Final Filings — distributions that become clawbacks.
• Creditor Proof of Claim and Bankruptcy Response Checklist — including the jury-trial waiver tradeoff.
• Bankruptcy and Creditors' Rights Toolkit — the full roadmap.

This article is provided for general informational purposes and does not constitute legal advice. Statutory dollar thresholds are adjusted periodically, circuits differ on several of the issues discussed, and state voidable transaction statutes vary. Consult qualified bankruptcy counsel on receipt of a demand letter or before structuring a transaction involving a financially distressed party.