What are “preference payments” in a Chapter 11 bankruptcy?

Preference payments, also known as “preferences”, are payments made by a debtor to a creditor during the 90 days prior to the filing of a bankruptcy. Preferences are payments that are preferential or give preferential treatment to one or more of the debtor’s creditors over others. In Alaska, Chapter 11 bankruptcy law permits the debtor to set aside or “avoid” these preferential payments as a way of distributing the debtors’ assets more fairly and equitably among all creditors. Preferences are often seen in Chapter 11 bankruptcy cases in Alaska and can take many forms, such as payments received by a creditor in the 90 days before a bankruptcy petition was filed, or payments made to a creditor that are disproportionately larger than the amounts paid to other creditors. An example of preferential payments in a Chapter 11 bankruptcy in Alaska could be when a debtor pays off a credit card debt the day before filing for bankruptcy. This would give that creditor preferential treatment over other unsecured creditors who were not paid during that 90-day period. To avoid unfairness to creditors, the Bankruptcy Code allows the debtor to “avoid” the preferential payments, meaning that the payments can be reversed and the money recovered by the bankruptcy estate. This money is then divided among all creditors pro rata, depending on the terms of the bankruptcy plan. Ultimately, it is up to the bankruptcy court to determine whether a payment is preferential and whether it can be recovered.

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What are “preference payments” in a Chapter 11 bankruptcy?

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