What are preferential payments in bankruptcy?

Preferential payments are transactions that take place between a debtor, creditor, and other third-party parties prior to a bankruptcy filing. When a company determines it is insolvent and unable to pay its debts as they come due, it may enter into bankruptcy proceedings. In certain situations, the company may have made payments or transfers of assets to creditors before entering bankruptcy which can be deemed preferential payments.

Preferential payments can arise in several different ways including cash payments, transfers of assets at less than fair market value or other preferential treatment given to one or more of the creditors. In order for the payment to be considered preferential, it must have been made within 90 days before filing for bankruptcy protection and must benefit only one creditor over all other creditors.

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