March 16, 2017 Articles

A Primer on Preference Actions in Bankruptcy

Your guide to the basics of preference actions and common defenses.

By Patrick Byrnes

The preference provisions of the Bankruptcy Code allow a bankruptcy trustee (or debtor in possession) to avoid and recover for the bankruptcy estate certain payments or other prepetition transfers made by a debtor to a creditor that allow the creditor to receive more than it would receive in a Chapter 7 liquidation. The preference statute, 11 U.S.C. § 547, serves at least two purposes: First, it facilitates a core bankruptcy policy of equality of distribution among the debtor’s creditors. This policy runs counter to the “first in time, first in right” system that characterizes non-bankruptcy debt collection. Second, the statute is intended to reduce creditors’ incentives to collect on debts that may push the debtor into bankruptcy. By deterring collection efforts, preference law may allow the debtor to improve its financial condition to the point that filing for bankruptcy is unnecessary.

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