What are Preferential Payments in Bankruptcy ?
Preferential payments in bankruptcy are payments made to creditors that are given priority over other creditors. In a Chapter 7 bankruptcy, preferential payments can be reclaimed by the trustee from the debtor's estate and distributed to creditors equally.
In a Chapter 13 bankruptcy, preferential payments must be repaid in full over the life of the repayment plan. Preferential payments can include taxes, child support, alimony, and certain debts owed to government entities.
The Bankruptcy Code provides for the avoidance of preferential payments made within 90 days before the filing of a bankruptcy petition. The purpose of this section is to prevent debtors from unfairly favoring one creditor over another by paying some creditors in full while others receive nothing.
If a debtor has made preferential payments to certain creditors within the required timeframe, the trustee may seek to recover those payments and distribute them equitably among all creditors.
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