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What is Preferential Debt Payment? A Legal Overview
Definition & Meaning
Preferential debt payment refers to a payment made by a debtor to a creditor within a specific time frame before filing for bankruptcy. This period is typically 90 days for general creditors and one year for insiders, such as family members or business partners. If the payment allows the creditor to receive more than they would in a standard Chapter 7 bankruptcy case, it is considered a preferential payment and is generally deemed illegal. However, bankruptcy courts may allow secured creditors to have priority over general creditors when distributing the debtor's available assets.
Table of content
Legal Use & context
This term is primarily used in bankruptcy law. It is relevant in cases where a debtor has made payments to certain creditors shortly before filing for bankruptcy. Legal practitioners may use this concept to challenge such payments through preference actions, which can be initiated by a debtor in possession or a bankruptcy trustee. Users can find legal templates and forms through resources like US Legal Forms to assist in managing these legal processes.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
(hypothetical example) A business owner pays off a loan to a family member three months before filing for bankruptcy. This payment is considered preferential if the family member receives more than they would in a bankruptcy case.
(hypothetical example) An individual pays a credit card bill in full just before declaring bankruptcy. If this payment allows the credit card company to receive more than they would under bankruptcy proceedings, it may be subject to recovery as a preferential payment.
Relevant laws & statutes
The primary statute governing preferential debt payments is found in the U.S. Bankruptcy Code, specifically 11 U.S.C. § 547. This section outlines the criteria for determining preferential transfers and the conditions under which they can be recovered.
Comparison with related terms
Term
Definition
Key Differences
Preferential Debt Payment
A payment made to a creditor shortly before bankruptcy that favors that creditor.
Specific time frame and conditions for recovery.
Fraudulent Transfer
A transfer made with the intent to hinder, delay, or defraud creditors.
Focuses on intent rather than timing and creditor preference.
Common misunderstandings
What to do if this term applies to you
If you believe you have made a preferential debt payment, it is crucial to consult a legal professional who specializes in bankruptcy law. They can help you understand your options and whether you may face a preference action. Additionally, you can explore US Legal Forms for templates to assist in managing your situation.
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