Subsequent New Value Defense (Bankruptcy) Law and Legal Definition

Subsequent new value defense is a statutory defense available to a creditor facing a preference action filed by a trustee of a bankruptcy estate (or a debtor in possession) to recover payments made by the debtor to a creditor prior to the filing of the bankruptcy petition. This is one of the most popularly used defenses.

According to 11 USCS § 547 (c)(4) a creditor can avoid to avoid relinquishing a transfer for which the creditor subsequently provided new value for the benefit of the bankruptcy estate. For this two elements are to be proved:

  • “new value” be given by the supplier after the supplier received payment; and
  • the supplier never received payment for the “new value”.

"new value" means money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds ofsuch property, but does not include an obligation substituted for an existing obligation. [11 USCS § 547]

In establishing the new value defense, Congress intended to encourage creditors to continue to deal with struggling businesses in the hope that these businesses would become stronger with ongoing operations.