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Simple English definitions for legal terms
preferential transfer
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A quick definition of preferential transfer:
A preferential transfer is when a person who owes money to many people gives more money or property to one of those people before they declare bankruptcy. This is not fair to the other people who are owed money. If this happens, the person in charge of the bankruptcy can take back the extra money or property and give it to everyone equally. This is called a voidable preference or preferential assignment.
A more thorough explanation:
A preferential transfer is a transfer made by an insolvent debtor to a creditor before filing for bankruptcy. This transfer allows the creditor to receive more than their fair share of the debtor's assets. For example, if a debtor owes money to multiple creditors but pays off one creditor before filing for bankruptcy, that payment is considered a preferential transfer.
However, if the transfer occurs no more than 90 days before the bankruptcy petition is filed or within one year if the creditor is an insider, the bankruptcy trustee may recover the preferential transfer for the benefit of the bankruptcy estate. This is because the transfer gives the creditor an unfair advantage over other creditors.
For instance, if a debtor sells a valuable piece of property to a family member for less than its market value and then files for bankruptcy, the bankruptcy trustee can recover the property from the family member and distribute it among all the creditors equally.