What is a preference action?
A preference action is a legal action used in New York creditors rights law. It is filed in order to claw back (or "avoid") a payment that was made by a debtor to a specific creditor before the debtor filed for bankruptcy. The purpose of a preference action is to ensure that all creditors receive equal treatment when a debtor goes through bankruptcy proceedings. A preference action attempts to reverse or void a payment made by a debtor in the 90-day period leading up to filing for bankruptcy. This payment must be deemed to have been made in an unfair or inequitable manner. In New York, the elements of a preference action require that the payment must have been made to or for the benefit of a particular creditor; the payment must have been made before the debtor filed for bankruptcy; the payment must have been made while the debtor was insolvent; and the payment must have resulted in a preference of the particular creditor over other creditors. In filing a preference action, creditors are required to list the payment details in order to prove the alleged preference. If the court finds in favor of the creditor, the payment is voided and the funds are redistributed to the other creditors of the debtor in question.
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