What is Bankruptcy Clawback?

A bankruptcy clawback occurs when someone who files for bankruptcy tries to recover money they paid to a business in the months before filing. They can force businesses to return the funds, even for services or goods already provided. The Bankruptcy Code (Section 547) permits a debtor to demand the return of those funds if the payment was made within 90 days before the bankruptcy filing.

This may seem unfair to businesses that have already delivered goods or completed services, but the reason clawbacks occur is to ensure that creditors are treated equally. When someone is nearing bankruptcy, they may pay certain creditors first – perhaps those who aggressively pressured payment or had closer business relationships. Bankruptcy law aims to prevent this “race to collect” and instead seeks to redistribute funds evenly among creditors.

However, for small businesses, unexpectedly having to provide reimbursement can be financially disruptive, especially when the funds have already been deposited, accounted for, and spent.

How to Protect your Business from Clawbacks

Proactive business practices can significantly reduce your exposure to clawbacks. The following actions can help protect your business from bankruptcy clawbacks:

1. Monitor Customer Financial Health: Business owners can and should regularly monitor a customer’s financial situation. Courts do not look favorably on creditors that continue to extend credit to a customer while having reason to believe they may be in financial distress.
2. Maintain Consistent Business Practices: It is important to demonstrate consistent, good faith behavior to show you never attempted to gain a preference with the debtor by pressuring or arranging to get paid before other creditors. Courts do not look favorably on creditors that attempt to gain preference and receive payment when they know a customer is in financial trouble. Once the terms of your relationship with the customer have been established, abide by those terms throughout the course of the business relationship or duration of the contract.
3. Avoid Aggressive Collection Tactics: When collecting debts owed to your business, be sure to follow contract provisions for debt collection and do not engage in aggressive tactics to satisfy the debt.
4. Shift the Risk: Consider requiring customers to take out a letter of credit from a bank to cover costs due to you. This adds protection from clawbacks because payment comes from the bank as opposed to the customer, so courts are more likely to view it as outside the scope for clawback action.
5. Document Everything: If you are ever faced with a clawback demand, documentation will be your strongest asset. This includes contracts, invoices, payment histories, email correspondence, communications about debt collection, and bank records.

 
How to Legally Fight a Clawback

If you receive a demand letter, take it seriously, but don’t panic. Trustees often send demand letters broadly to all creditors who received payments within the 90-day period. Many cases are resolved through negotiation. Automatically paying may forfeit a strong defense.

You should first review and verify the following information:

• If the payments were within the 90-day window
• If they were for prior invoices
• If there were subsequent goods or services provided after payment
• If the trustee calculated the amounts correctly

 
Common legal defenses that may apply:

• If payments were made in a consistent, ordinary pattern between you and the customer, you may not have to return the funds. Courts compare payment timing and practices before and during the 90-day period.

• If payment and delivery of goods or services occurred at the same time (for example, cash on delivery), the transaction may be protected.

• If the debtor paid you, and you later provided additional goods or services before bankruptcy, the value of those later goods/services can reduce or offset the clawback claim.

• Most bankruptcy clawback claims settle. Trustees typically prefer negotiated resolutions over litigation. In many cases, settlements result in payment of a fraction of the original demand, or sometimes no payment at all if you present a strong defense.

 
If settlement fails, the trustee may file a proceeding against you in bankruptcy court. At that stage, retaining an experienced bankruptcy lawyer becomes essential.

Bankruptcy clawbacks can feel unjust, especially when you earned the money in good faith. But they are a well-established feature of federal bankruptcy law designed to promote fairness among creditors. The best protection is being proactive.

For small business owners, understanding clawbacks before they happen can mean the difference between a manageable legal issue and a significant financial loss.

If you have any questions about bankruptcy clawbacks, contact the NFIB Legal Center at (800) 552-NFIB or info@nfib.org

Updated February 18, 2026