A payment or other transfer by a debtor to or for the benefit of a creditor for an already existing debt made while the debtor was insolvent (or that rendered the debtor insolvent) and that enabled the creditor to receive more than it would have received in a liquidation of the debtor’s assets.
Generally, transfers made within 90 days prior to bankruptcy may qualify as preferences. But if the transfer is made to or for the benefit of an insider of the debtor, the transfer may qualify as a preference if it was made within one year prior to the bankruptcy. A transferee often escapes liability in a preference action by successfully asserting one or more of the defenses provided by the Code (see, e.g., New Value Defense and Ordinary Course Defense).
Fully secured creditors or oversecured creditors cannot be liable for preferences because the trustee will not be able to establish that the creditor received more by virtue of the transfer than the lender would receive in a liquidation.
A preference suit is maddening from a creditor’s perspective because the creditor is often still owed money by the debtor and yet is being sued for receiving some portion of what the creditor was rightfully owed in the first place.
Bankruptcy Code § 547. See also Avoidance Action, Insider, New Value Defense, Ordinary Course Defense, Oversecured, Preference Action, Undersecured.