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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:

  1. The transfer was "to or for the benefit of a creditor."
  2. The transfer was made for or on account of an "antecedent debt"—that is, a debt owed prior to the time of the transfer.
  3. The debtor was insolvent at the time of the transfer.
  4. The transfer was made within 90 days before the date of the filing of the bankruptcy petition or was made between 90 days and one year before the date of the filing of the petition to an insider who had reasonable cause to believe that the debtor was insolvent at the time of the transfer.
  5. The transfer has the effect of increasing the amount that the transferee would receive in a liquidation proceeding under chapter 7 of the bankruptcy law (11 U.S.C.A. § 701 et seq.). 11 U.S.C.A. § 547.

Other statutory provisions, however, create exceptions; if a transfer comes within an exception, the bankruptcy trustee cannot invalidate the transfer even though the aforementioned five elements exist.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.


n. in bankruptcy, the payment of a debt to one creditor rather than dividing the assets equally among all those to whom he/she/it owes money, often by making a payment to a favored creditor just before filing a petition to be declared bankrupt. Such a preference is prohibited by law, and the favored creditor must pay the money to the bankruptcy trustee. However, the bankruptcy court may give secured creditors (with a judgment, lien, deed of trust, mortgage or collateralized loan) a legal preference over "general" creditors in distributing available funds or assets. (See: bankruptcy)

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

PREFERENCE. The paying or securing to one or more of his creditors, by an insolvent debtor, the whole or a part of their claim, to the exclusion of the rest. By preference is also meant the right which a creditor has acquired over others to be paid first out of the assets of his debtor, as, when a creditor has obtained a judgment against his debtor which binds the latter's land, he has a preference.
     2. Voluntary preferences are forbidden by the insolvent laws of some of the states, and are void, when made in a general assignment for the benefit of creditors. Vide Insolvent; Priority.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.
References in periodicals archive ?
The 77-year-long tendency for American adults to express overall preferences for a boy over a girl is driven by the marked preference among men for a baby boy and the more closely divided preferences among women.
At the Royal School, Wolverhampton, there were a total of 21.4 preferences for each place, and 8.9 first preferences per place, with just 11 per cent of those who put it as a first choice offered a place, making it the toughest secondary school in England to get a spot.
The Royal School in Wolverhampton was the hardest secondary to get into, with just 11% of those who put it as a first preference getting a place.
The redemption will also result in the discontinuance of USD16.4 million in annual payments by Butterfield for Preference Share dividends and the guarantee fees payable to the Government of Bermuda, which will be accretive to earnings going forward.
The courts are divided over whether the Section 547(c) (4) new value defense includes paid new value as they have interpreted the meaning of Section 547(c)(4)(B)'s requirement that the new value asserted as a preference defense cannot be paid by an otherwise unavoidable transfer to or for the benefit of the creditor in conflicting ways.
As noted above, implementing a preference management system will not be easy, particularly if you have a well-established servicing infrastructure, which is often a polite way of saying a highly dated and possibly even mainframe-based environment.
On the other hand, social preferences cannot correspond exactly to individual preferences either, if only because the latter vary from one individual to the next.
Sebi has recently allowed listing of non-convertible redeemable preference shares, that is, those that are not convertible into equity shares and are redeemed at maturity.
Asking an individual to quantify how satisfied she is with her life would seem to be a relatively more promising vehicle for ascertaining her degree of preference utility than asking her how happy she is.
William Hulme's Grammar School, in Manchester was the next hardest secondary to get into locally, with just 39pc of those who put it as a first preference getting a place.
Peter Gladwin Primary School, in Brighton and Hove, was the hardest primary to get into, with just 10% of those who put it as a first preference getting a place.
Northam is pleased to announce that, since the date of the previous announcement, Northam has acquired additional Zambezi preference shares and has reached agreement to acquire further Zambezi preference shares, as detailed in paragraph 3 below.