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

In Mississippi, “preference payments” are payments made to a creditor from a debtor prior to the debtor filing for a Chapter 11 bankruptcy. These payments must be made within 90 days of the filing of the bankruptcy or within one year of the filing if the creditor is an insider of the debtor. Preference payments must also be for more than the amount the debtor owes the creditor before the filing. These payments are considered preferential because the creditor receives a greater portion of the money owned as compared to the other creditors. When the court recognizes preference payments, it may order the creditor to return the payment to the debtor’s bankruptcy estate so that all creditors may receive their fair share of the assets. This is known as ‘avoiding’ or ‘recapturing’ the payment. The court may also order the debtor’s creditors to provide documents and financial records that may prove that preference payments were made to certain creditors, so the debtor is likely to be asked to provide these documents as well. The court may choose not to order repayment of preference payments if the payments were made to secure the creditor’s interest in the debtor’s assets. The court may also decide to deny the repayment if the recipient of the payment can show that the payment was made to fulfill an existing debt, or if the payment was made through an offer and acceptance. The court may also deny repayment if the court finds that the payment was made for basic necessities, such as food and shelter.

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