Preference Payments: A Primer

A preference occurs when a bankrupt debtor treats one creditor more favorably than another. For example, a debtor may choose to use all of its assets to pay off the entire debt owed to one creditor, leaving a second creditor unable to collect any money at all. A court will disallow a preference if payment is made for the benefit of a creditor, for a debt owed prior to the bankruptcy filing, the payment is made while the debtor is insolvent and the transfer is made within ninety days of the debtor’s filing the bankruptcy petition (or one year, if the payment was made to an insider such as a relative or corporate director).

In such a situation, a creditor receiving a preference may be forced to restore it to the debtor’s estate. However, as a general rule, creditors only need to show the payment was made in the ordinary of course of business, in order to avoid having to pay back any monies to a trustee or debtor-in-possession.

In addition, the law bars the pursuit of a preference action by a debtor or trustee when the aggregate amount of the payments in question to a creditor is less than $5,000. Also, any attempts to recover amounts less than $10,000 for any one creditor, by a debtor or trustee, must be made in the District Court in the creditor’s jurisdiction rather than in the U.S. Bankruptcy Court where the case is being administrated.

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