Preference
What does "Preference" mean in law?
A preference, governed by 11 U.S.C. section 547, is a transfer of the debtor's property to or for the benefit of a creditor, made on account of an antecedent debt, while the debtor was insolvent, within 90 days before the bankruptcy filing (or one year for insider transfers), that enables the creditor to receive more than it would in a Chapter 7 liquidation. The trustee may avoid preferential transfers to recover the property for the estate and ensure equal treatment among similarly situated creditors. Several statutory defenses exist under section 547(c), including transfers made in the ordinary course of business, contemporaneous exchanges for new value, and subsequent new value given by the creditor. The preference power embodies bankruptcy's core equality principle by preventing creditors from gaining an advantage through last-minute collections.
Definition
A preference, governed by 11 U.S.C. section 547, is a transfer of the debtor's property to or for the benefit of a creditor, made on account of an antecedent debt, while the debtor was insolvent, within 90 days before the bankruptcy filing (or one year for insider transfers), that enables the creditor to receive more than it would in a Chapter 7 liquidation. The trustee may avoid preferential transfers to recover the property for the estate and ensure equal treatment among similarly situated creditors. Several statutory defenses exist under section 547(c), including transfers made in the ordinary course of business, contemporaneous exchanges for new value, and subsequent new value given by the creditor. The preference power embodies bankruptcy's core equality principle by preventing creditors from gaining an advantage through last-minute collections.
Example
Three weeks before filing bankruptcy, a company paid $50,000 to one trade vendor while other similar vendors received nothing, and the trustee successfully avoided the payment as a voidable preference.