(A) A payment that is made by a debtor to a creditor during a period just prior to filing for bankruptcy. It is called a preference because the debtor has decided which of his creditors should receive the balance of his or her assets at the unfair expense of others who will be left with nothing to collect. Usually this period of preference deals with disposition of money or property to regular commercial creditors within three months of filing bankruptcy and within one year for insiders who may be creditors, such as family, friends and business partners. A trustee can recover the money paid as preference from the distributees and distribute it among all of the creditors. (B) The paying or securing to one or more of his creditors, by an insolvent debtor, the whole or a part of their claim, to the exclusion of the rest. By preference is also meant the right which a creditor has acquired over others to be paid first out of the assets of his debtor, as, when a creditor has obtained a judgment against his debtor which binds the latter’s land, he has a preference. 2. Voluntary preferences are forbidden by the insolvent laws of some of the states, and are void, when made in a general assignment for the benefit of creditors. Vide Insolvent; Priority.
Law Dictionary – Alternative Legal Definition
The act of an insolvent debtor who, in distributing his property or in assigning it for the benefit of his creditors, pays or secures to one or more creditors the full amount of their claims or a larger amount than they would be entitled to receive on a pro rata distribution. Also the right held by a creditor, in virtue of some lien or security, to be preferred above others (i.e., paid flrst) out of the debtor’s assets constituting the fund for creditors.