Lesson 50: Preferences

In bankruptcy law, a "preference" refers to a payment or transfer of an interest in property made by a debtor to a creditor before filing for bankruptcy. These payments may give the creditor more than it would receive in the debtor's bankruptcy case. Understanding preferences is crucial for both debtors and creditors in navigating bankruptcy proceedings.

Key Concepts:

  • Definition of Preferences
  • Elements of a Preference Action
  • Defenses to Preference Actions

Definition of Preferences

A preference is typically defined under Section 547 of the Bankruptcy Code and includes the following elements:

  • Transfer of property of the debtor
  • To or for the benefit of a creditor
  • For or on account of an antecedent debt
  • Made while the debtor was insolvent
  • Made within 90 days before the filing of the bankruptcy petition, or within one year if the creditor was an insider
  • That enables the creditor to receive more than it would in a Chapter 7 liquidation case

Elements of a Preference Action

To avoid a transfer as a preference, a trustee must prove all the elements defined above. Here is a visual representation of the elements:

graph TD A["Transfer of property of the debtor"] --> B["To or for the benefit of a creditor"] B --> C["For or on account of an antecedent debt"] C --> D["Made while the debtor was insolvent"] D --> E["Made within 90 days before filing petition"] E --> F["Enables creditor to receive more than in Chapter 7"]

Defenses to Preference Actions

Creditors have several defenses they can use to challenge a preference action:

  • New Value Defense
  • Ordinary Course of Business Defense
  • Contemporaneous Exchange for New Value

New Value Defense

If a creditor gives new value to the debtor after the preference payment, this new value can offset the amount considered as a preference.

Ordinary Course of Business Defense

This defense applies if the payment was made in the ordinary course of business between the debtor and creditor and follows the normal payment terms of their previous transactions.

Contemporaneous Exchange for New Value

This applies when the transfer was intended by both the debtor and the creditor to be a contemporaneous exchange for new value, and in fact, was a substantially contemporaneous exchange.

Further Reading

For more information on related topics, please refer to these lessons:

For a deeper dive into the history and structure of bankruptcy law, check out Lesson 1: History of Bankruptcy Law.

For a comprehensive guide on bankruptcy law fundamentals, consider reading Bankruptcy and Insolvency Accounting, Practice and Procedure.

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