Preference Action (Bankruptcy) Law and Legal Definition

A preference action is an action brought by the Trustee of a bankruptcy estate (or a debtor in possession) to recover payments made by the debtor to a creditor prior to the filing of the bankruptcy petition. Preferential debt payments can be made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor's chapter 7 case. This type of preference is illegal. By providing a preference action the Bankruptcy Code provides a mechanism to remedy past preferential treatment of certain creditors for the benefit of all.

In order to bring an action for preferential payment the trustee must satisfy the requirements set forth in 11 USCS § 547. The trustee should prove that the payment was a transfer of an interest of the debtor in property made to or for the benefit of a creditor for or on account of an antecedent debt owed by the debtor before such transfer was made. It should be made while the debtor was insolvent or on or within 90 days before the date of the filing of the petition; or between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider. Such transfer should enable the creditor to receive a greater distribution than it otherwise would have in a hypothetical chapter 7 distribution. Typically, a Trustee has two years from the bankruptcy petition date to bring the preference action. The Trustee bears the burden of proof in establishing all of the elements of the prima facie case. The creditors can defend the action by raising the statutory defenses provided in11 USCS § 547