Preference

• Author: Jeffrey Lehman, Shirelle Phelps

Page 61

The act of an insolvent debtor who pays one or more creditors the full amount of their claims or a larger amount than they would be entitled to receive on a pro rata distribution.

For example, a debtor owes three creditors $5,000 each. All three are equally entitled to payment, but the debtor has only $12,000 in assets. Instead of paying each creditor $4,000, the debtor pays two creditors in full and pays the third creditor the remaining $2,000.

The COMMON LAW does not condemn a preference. Some state statutes prescribe that certain transfers are void?of no legal force or binding effect?because of their preferential character. If a state antipreference provision protects any actual creditor of the debtor, the trustee in BANKRUPTCY can take advantage of it.

Bankruptcy law does condemn certain preferences. The bankruptcy trustee can void any transfer of property of the debtor if the trustee can establish the following:

The transfer was "to or for the benefit of a creditor."

The transfer was made for or on account of an "antecedent debt"?that is, a debt owed prior to the time of the transfer.

The debtor was insolvent at the time of the transfer.

The transfer was made within 90 days before the date of the filing of the...