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

In North Dakota, preference payments refer to payments that are made from a debtor to certain creditors. These payments must have been made in the 90 days leading up to the filing of a Chapter 11 bankruptcy. Preference payments are made to creditors who are usually considered to be privileged over other creditors, such as those connected to family members, or those with an insider relationship. In the case of a Chapter 11 bankruptcy, these same preference payments can be challenged and returned to the debtor, as the court looks to distribute assets as fairly as possible. The purpose of preference payments is to provide an incentive for the debtor to pay certain creditors ahead of others; however, these payments can negatively impact the bankruptcy process. When preference payments are made before filing Chapter 11, they can leave the other creditors with reduced or no recourse against the debtor, which could reduce the amount of money available to be distributed amongst the other creditors. Preference payments can also be seen as an act of desperation, as the debtor attempts to pay back creditors quickly in order to avoid filing for bankruptcy. In the case of a Chapter 11 bankruptcy, these payments must be addressed, as the court looks at all payments made before the filing of the bankruptcy to ensure that all creditors are treated fairly.

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

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