What is a Preference Action (Bankruptcy) and Its Legal Implications?
Definition & meaning
A preference action in bankruptcy is a legal action initiated by the trustee of a bankruptcy estate or a debtor in possession. This action seeks to recover payments made by the debtor to a creditor before the bankruptcy petition was filed. Specifically, it targets payments made within 90 days prior to the bankruptcy filing (or up to one year if the creditor is an insider) that allow the creditor to receive more than they would in a typical Chapter 7 bankruptcy case. Such payments are considered preferential and are illegal under bankruptcy law.
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Preference actions are primarily used in bankruptcy law. They are relevant in cases where a debtor has made payments to certain creditors shortly before filing for bankruptcy. This legal mechanism ensures that all creditors are treated fairly and that no single creditor is unjustly favored over others. Individuals or businesses facing bankruptcy can utilize legal forms to initiate a preference action, often with the assistance of legal templates provided by services like US Legal Forms.
Key Legal Elements
Real-World Examples
Here are a couple of examples of abatement:
Example 1: A business pays off a significant loan to a bank just 60 days before filing for bankruptcy. This payment could be challenged as a preference action since it may give the bank a better recovery than other creditors.
Example 2: A debtor pays a family member (an insider) a debt one year before filing for bankruptcy. This payment may also be subject to a preference action, as it could unfairly favor the family member over other creditors. (hypothetical example)
Relevant Laws & Statutes
The primary statute governing preference actions is found in 11 U.S.C. § 547. This section outlines the conditions under which a trustee can recover preferential payments made by a debtor before bankruptcy.
Comparison with Related Terms
Term
Definition
Key Differences
Preference Action
Action to recover payments made to creditors before bankruptcy.
Focuses on payments that unfairly favor certain creditors.
Fraudulent Transfer
Transfer made to avoid creditors or defraud them.
Involves intent to deceive, rather than just timing of payments.
Common Misunderstandings
What to Do If This Term Applies to You
If you believe a preference action may apply to your situation, consider the following steps:
Review your recent payments to creditors.
Consult with a bankruptcy attorney to understand your options.
Explore legal form templates from US Legal Forms to help you navigate the process.
If the situation is complex, seek professional legal assistance.
Quick Facts
Typical Timeframe: 90 days (or up to one year for insiders)
Jurisdiction: Federal bankruptcy court
Burden of Proof: On the trustee
Possible Defenses: Statutory defenses under 11 U.S.C. § 547
