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Simple English definitions for legal terms
preference
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A quick definition of preference:
Preference in law is a way for a trustee to get back money that a debtor paid to creditors before filing for bankruptcy. The trustee can only do this if the payments were made within a certain time period, usually 90 days, and meet other requirements. This is done to discourage creditors from demanding too much money from someone who can't pay, which could cause them to go bankrupt and hurt other creditors.
A more thorough explanation:
In law, preference refers to a tool used in bankruptcy called recapture. This allows a trustee to recover payments made by the debtor to creditors before the bankruptcy proceeding. The purpose of recapture is to prevent creditors from aggressively pursuing payments from insolvent debtors, which could lead to bankruptcy or harm other creditors' claims.
In order for a trustee to recapture preference payments, the payments must meet certain requirements:
- The payments must have been made within a set period of time, usually 90 days for most creditors.
- The payments must exceed what the creditor would receive in a Chapter 7 liquidation action.
For example, if a debtor owes money to two creditors and pays one of them $10,000 within 90 days of filing for bankruptcy, the trustee may be able to recapture that payment if it exceeds what the creditor would receive in a Chapter 7 liquidation. This means that the trustee could take back the $10,000 payment and distribute it among all the creditors equally.
Overall, preference is a bankruptcy tool that helps ensure fair treatment of creditors and prevent aggressive collection actions that could harm the debtor's financial situation.