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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 shares of the Series A Preferred Stock (NYSE: MTBPr) and the shares of the Series C Preferred Stock (NYSE: MTBPrC) will be redeemed on August 30, 2019 (the "Redemption Date") at a redemption price of USD 1,000 per share, plus all accrued and unpaid dividends to, but excluding, the Redemption Date (the "Redemption Price").
Certificates or book entry holdings representing shares of either the Series D Preferred Stock or Series E Preferred Stock and receipts evidencing either the Series D Depositary Shares or Series E Depositary Shares called for redemption should be surrendered for payment at the following address:
The higher yield of preferred shares is partly because they have longer tenors or perpetual or forever while bonds have a fixed tenor of a certain number of years (mostly two years for the issuances mentioned above).
In accordance with the amendment to article 152 of the Resolution Law, senior non-preferred obligations are subordinated to depositors and unsecured unsubordinated obligations of the issuer, which become senior preferred obligations, and senior to all junior obligations of the issuer.
With the addition of the Free Preferred Lifetime Nationwide Warranty, customers of Ginger's Jewelry have the benefit of nationwide protection, assurance and trust for all their fine jewelry purchases.
Meanwhile, a mere 3 percent of respondents said that Nokia was their preferred brand, followed by BlackBerry at 2 percent and Microsoft at 1 percent.
Students' perceptions of the actual learning environment (as opposed to their preferred environment) resulted in a higher scale mean in the hybrid course (m=4.23) compared to the online course (m=3.12).
If a corporation owned 500 shares of a $6 preferred stock, it would receive $3,000 (500 x $6) annually in dividends.
The revised rule addresses supervisory concerns, competitive equity considerations, and the changes in the treatment of trust preferred securities under generally accepted accounting principles.
Preferred Freezer plans to use a portion of the proceeds to fund the company's continued growth.