Preference Law and Legal Definition

Preference is a term subject to different meanings, but in bankruptcy law, it refers to a creditor who gets paid before 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. This type of preference is illegal, and the favored creditor must pay the money to the bankruptcy trustee. However, the bankruptcy court may give legally give secured creditors a legal preference over "general" creditors in distributing available funds or assets. Secured creditors usually include those with a judgment, lien, deed of trust, mortgage or collateralized loan.

Preferences are transfers of a debtor's property to a creditor, or to benefit a creditor, for payment of a prior debt, which result in the creditor receiving more than the creditor would have received in a Chapter 7 Bankruptcy if the property had not been transferred. The transfer must occur when the debtor is insolvent and, generally, within 90 days before the bankruptcy filing.