What are preferential payments in bankruptcy?

In bankruptcy, a preferential payment is a payment made to one creditor that gives that creditor a better status than other creditors. The Bankruptcy Code generally prohibits these payments, because they give some creditors an advantage over others.

However, there are exceptions to the rule prohibiting preferential payments. Some payments may be permissible if they meet certain requirements, such as being made in the ordinary course of business or not giving the creditor more than what it would have received in a Chapter 7 liquidation.

If a debtor makes a preferential payment, the trustee may be able to recover the money and distribute it to all creditors equally. This can level the playing field for all creditors and help them get fairly compensated for their claims against the debtor.

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