In legal contexts, preference typically refers to a transaction or transfer of property made by a debtor to a creditor or other party that gives the recipient an advantage over other creditors. This advantage may involve the payment of a debt, the transfer of assets, or the granting of security interests shortly before the debtor files for bankruptcy or becomes insolvent. Preferences can raise concerns about fairness and equality among creditors, as they may result in some creditors receiving preferential treatment over others. To address this issue, bankruptcy laws often contain provisions allowing trustees or creditors to challenge and potentially reverse preferential transfers, ensuring that assets are distributed equitably among creditors. Preferences are subject to specific criteria and timeframes set forth in bankruptcy statutes, and challenging a preference typically involves demonstrating that the transfer meets these criteria and was made with the intent to unfairly advantage the recipient.
n. in bankruptcy, the payment of a debt to one creditor rather than dividing the assets equally among all those to whom he/she/it owes money, often by making a payment to a favoured creditor just before filing a petition to be declared bankrupt.
Such a preference is prohibited by law, and the favoured creditor must pay the money to the bankruptcy trustee. However, the bankruptcy court may give secured creditors (with a judgment, lien, deed of trust, mortgage or collateralized loan) a legal preference over “general” creditors in distributing available funds or assets.
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This glossary post was last updated: 29th March, 2024.
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