Preference Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Preference, written in plain English, along with examples of how it is used.
What is Preference?
n.Accoring to laws of bankruptcy when a person goes bankrupt before writing a court order to declare it he might make a prefernce to pay off certain creditor rather then dividing his assets equally among his creditors.This is illegal and it is the court who decides to pay off the secured creditors before the general creditors.
History and Meaning of Preference
In a legal context, a preference refers to a payment made by a debtor to one creditor over another in the period leading up to a bankruptcy filing. This payment can be in the form of cash or the transfer of assets, and it is done to the detriment of other creditors who are left to divide the remaining assets. This practice is illegal and goes against the principle of impartial distribution of assets among creditors.
The purpose of the preference rule is to prevent debtors from transferring assets to friendly creditors in the lead-up to bankruptcy, and to ensure that all creditors share equally in the remainder of the debtor's assets.
Examples of Preference
- A business owner sells their office building to their brother for a significantly lower price than its market value, prior to declaring bankruptcy. This would be considered a preference.
- A debtor, upon realizing that bankruptcy is imminent, pays off their child's student loan debt in full, while leaving other creditors unpaid or underpaid. This would be considered a preference.
- A debtor transfers title of a car to their sister just before declaring bankruptcy, so that the car will not be available for distribution to creditors. This would be considered a preference.
Legal Terms Similar to Preference
- Fraudulent transfer: A transfer of assets made by a debtor with the intention of defrauding creditors.
- Preferential payment: A payment made by a debtor to one creditor in preference to others, which can be avoided or set aside by a court.
- Bankruptcy estate: The collective assets owned by the debtor at the time of filing for bankruptcy, which are made available to creditors for distribution.