Preferential TransferCredit Repair Definition
A payment made by an insolvent debtor to a specific creditor shortly before filing bankruptcy, potentially recoverable by the trustee.
Definition
A preferential transfer (or preference payment) in bankruptcy law refers to a payment or transfer of property made by a debtor to a particular creditor within a certain period (typically 90 days, or one year for insiders like family members or business partners) before filing for bankruptcy, that gives that creditor more than they would have received in the bankruptcy liquidation process. The Bankruptcy Code allows the bankruptcy trustee to 'avoid' or 'claw back' these preferential transfers. The purpose is to ensure fair and equal treatment among creditors of the same class by preventing the debtor from favoring certain creditors over others just before filing bankruptcy. Recovered funds are added back to the bankruptcy estate for distribution according to legal priorities.
Frequently Asked Questions
What are the requirements for a transfer to be considered preferential?
Generally, a transfer is preferential if it was: (1) To or for the benefit of a creditor; (2) For or on account of an antecedent (pre-existing) debt; (3) Made while the debtor was insolvent; (4) Made within 90 days before filing bankruptcy (or 1 year for insiders); and (5) Enabled the creditor to receive more than they would have in a Chapter 7 liquidation.
Are there defenses against preference claims?
Yes, common defenses include: the transfer was made in the ordinary course of business between the debtor and creditor; the transfer was a contemporaneous exchange for new value (e.g., paying cash for goods delivered at the same time); or the payments were for domestic support obligations.
Do regular payments on secured loans count as preferences?
Generally, regular payments made on fully secured loans (where collateral value equals or exceeds the debt) are not considered preferential because the secured creditor would have received the collateral's value anyway in liquidation.
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