What are Preferences in Bankruptcy?

Preferences in bankruptcy refer to specific transactions that occur before the bankruptcy filing, where a debtor pays certain creditors more than others, potentially giving them an unfair advantage. This concept is rooted in the principle that all creditors should be treated fairly during the insolvency process. According to bankruptcy law, these pre-filing payments may be subject to recovery by the bankruptcy trustee if they meet certain criteria, such as being made within a specific time frame and causing harm to the overall creditor pool.

The notion is designed to prevent a debtor from favoring one creditor over others in the period leading up to the bankruptcy filing. When a trustee identifies such preferential payments, they may seek to reverse them and recover the funds for redistribution among all creditors, ensuring equitable treatment. This aspect of bankruptcy law supports the objective of achieving fairness and transparency in the distribution of the debtor's assets.