Preferential Debt Payment Law and Legal Definition

Preferential debt payments refer to a debt payment 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. However, the bankruptcy court may legally give secured creditors a legal preference over "general" creditors in distributing available funds or assets.

A debtor in possession or a Trustee of a bankruptcy estate can bring a preference action to recover these payments made by the debtor to a creditor prior to the filing of the bankruptcy petition. The Trustee must satisfy the requirements set forth in 11 USCS § 547 in order to successfully establish a prima facie case for recovery of a preferential payment. The creditors can defend the action by raising the statutory defenses provided in 11 USCS § 547