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  1. Bankruptcy Glossary
  2. Preferential Debt Payment

What is Preferential Debt Payment?

Bankruptcy law prohibits preferential debt payments because it promotes unfairness and inequality of debt repayment to creditors. Disallowing preferential debt payments avoids preference to a particular creditor and stops creditors' attempts to get to the debtor's assets prior to the bankruptcy proceeding. If a creditor engages in preferential debt payment they may be forced to surrender the property they have obtained when the trustee exercises their power to confiscate the property.

Under bankruptcy law (Section 547) the trustee is able to cancel or avoid any transfer of the debtor's assets if the transfer is 1) considered preferential and is for the benefit of the creditor; 2) if the transfer was made while the debtor was considered insolvent; 3) if the debt payment was made for a debt owed prior to the transfer. In addition to the above, the transfer must have been made 90 days or less from the date of the bankruptcy petition date or 90 days to 1 year prior to filing the bankruptcy petition if the bankruptcy creditor was considered an insider at the time the transfer was made. In addition, the creditor must have received more preference than they would have received from the Chapter 7 Bankruptcy case (if the transfer had not been done and if they had received the allowable debt payments under bankruptcy law).