What is Preference? A Deep Dive into Legal Definitions and Implications

Q: Can I defend against a preference claim?

Yes, there may be defenses available, such as proving the transfer was for a legitimate purpose or occurred outside the preference period.

Q: What happens if a payment is deemed a preference?

The creditor may be required to return the payment to the bankruptcy estate for equitable distribution among all creditors.

Definition & Meaning

In the context of bankruptcy law, "preference" refers to a situation where a debtor pays a specific creditor more than they would have received in a bankruptcy proceeding. This typically occurs when the debtor makes a payment to a favored creditor shortly before filing for bankruptcy. Such actions are considered illegal because they disrupt the fair distribution of assets among all creditors. If a preference is identified, the favored creditor may be required to return the payment to the bankruptcy trustee for equitable distribution among all creditors.

Table of content

Legal Use & context

Preference is primarily used in bankruptcy law. It is crucial in ensuring that all creditors are treated fairly during the bankruptcy process. Legal practitioners often deal with preferences when assessing a debtor's financial transactions leading up to bankruptcy. Users may find relevant forms and templates through US Legal Forms to help navigate these situations.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A business owner pays off a loan to a friend just weeks before declaring bankruptcy. This payment may be considered a preference if the friend receives more than they would have in the bankruptcy proceedings.

Example 2: A homeowner makes a large payment on a mortgage to avoid foreclosure shortly before filing for bankruptcy. This could also be classified as a preference.

Relevant laws & statutes

The primary statute governing preferences in bankruptcy is Section 547 of the Bankruptcy Code. This section outlines the conditions under which a transfer can be considered a preference and the rights of creditors in such cases.

Comparison with related terms

Term	Definition	Key Difference
Preference	A payment to a favored creditor before bankruptcy.	Focuses on preferential treatment of creditors.
Fraudulent Transfer	A transfer made to avoid creditor claims.	Involves intent to defraud creditors, not just preferential treatment.

Common misunderstandings

What to do if this term applies to you

If you suspect that a payment you made may be classified as a preference, consider consulting a legal professional for guidance. You can also explore US Legal Forms for templates that may assist you in documenting your situation or filing necessary forms.

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Quick facts

Preferences are illegal in bankruptcy proceedings.
Transfers must occur within 90 days before filing for bankruptcy.
Creditors may be required to return payments classified as preferences.

Key takeaways

Frequently asked questions

What is a preference in bankruptcy?

A preference is a payment made to a specific creditor that gives them an advantage over other creditors before a bankruptcy filing.