What is a preference action?

A preference action is a legal action that creditors can take against a debtor if they receive payments from the debtor that was made before filing for bankruptcy. This action is allowed because the debtor is trying to use the available funds to pay off specific creditors before filing for bankruptcy. In California creditors can sue for preference actions to further protect their rights. These preference actions are applicable in cases where the debtor has paid off certain creditors before filing for bankruptcy. The court would then evaluate if the payments made to the creditors were disproportionate to the payments made to others. If a preference action is initiated, the court will determine whether the debtor intended to prefer a certain creditor over others. This means the court will review if the funds were transferred in good faith or if they were moved fraudulently with the intent of paying off one creditor over the others. The court will then decide if the amount of payments made to the creditor is excessive compared to what was paid to other creditors. If the court finds that the debtor deliberately paid preferential creditors, the court may order the funds be returned to the general creditors. Additionally, the court might also demand the creditors hand over any property—like unpaid interest, dividends, or other payments—they received from the debtor because of the preference.

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What is a preference action?

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