One of the concerns for creditors dealing with a distressed company is the possibility of bankruptcy, and the risk that payments to the creditor on account of previously incurred debt will be avoided as a "preference" in the debtor's bankruptcy proceeding. Generally speaking, a "preference" is a transfer of the debtor's property on the eve of bankruptcy to satisfy an old debt. The Bankruptcy Code allows a bankrupt company to reach back 90 days and avoid any transfers made to creditors during that time, subject to certain defenses.

In September 2011, in In re Longview Aluminum, LLC, 10-2780 (7th Cir. 2011), the Seventh Circuit Court of Appeals held that members of an LLC are insiders for preferential transfer purposes under the Bankruptcy Code. This is the case even if the member holds only a minority membership interest and is not actually in control of the enterprise.

A secured creditor's option to credit bid its claim where its collateral is to be sold under a chapter 11 plan is an important protection to ensure that the creditor's collateral is not sold for less than its actual value. Rather than accepting the cash generated by a low bid, the creditor can submit its own bid, up to the amount of its secured claim, and recover its collateral instead. This traditionally recognized right was upset by two fairly recent circuit court decisions, one from the Fifth Circuit and one from the Third Circuit. In re Pacific Lumber Co., 584 F.3d 229 (5th Cir.

The United States Bankruptcy Code provides that any interest that a debtor holds in property as of the date of the debtor's bankruptcy filing becomes property of the debtor's bankruptcy estate. 11 U.S.C. § 541(c)(1). In a chapter 7 bankruptcy case, a trustee will be appointed to, among other things, liquidate property of the debtor's bankruptcy estate for the ultimate payment of the debtor's creditors. 11 U.S.C. § 704(a)(1).