11 U.S. Code § 547 - Preferences
A preference in U.S. federal bankruptcy law is a transfer of property by a debtor to its creditor, on account of a pre-existing debt, that is made while the debtor is insolvent and gives the creditor more than it would obtain in a liquidation of the debtor's assets in a bankruptcyproceeding. It is primarily a creature of the U.S. Bankruptcy Code, although some states have similar state laws. If the preferential transaction takes place within a specified period of time before the filing of bankruptcy by or on behalf of the debtor, then the debtor's trustee in bankruptcy is authorized to recover the property preferentially transferred. The mechanism of recovery is the avoidance of the transfer. After such avoidance, the recovered property becomes property of the bankruptcy estate. The period is usually 90 days. However, if the preferential transfer is made to an "insider," then the period is one year. An "insider" is generally a relative or one who has the ability to control the activities of the debtor. The Bankruptcy Code provides some exemptions from these rules to accommodate transfers intended to be contemporaneous, made in the ordinary course of business or to the extent they are made for new value, and others.
All of the following examples assume that the requirements for a preference that are set out above exist at the time the transfer is made.
- Securing a previously unsecured debt.
- Substituting property of greater value as security for existing security property whose value is insufficient to completely secure repayment of the debt.
- Paying some but not all unsecured creditors.
- In a real estate transaction, delaying the recording of a mortgage for more than 30 days after the debt it secures is created.