When an individual owes money and offers a valuable item to a creditor as payment, but the court determines that this action was unfair to other creditors, the creditor may be required to return what they received. This is known as surrendering a preference. The creditor returns the received item so that the trustee can equitably distribute the funds or property among all creditors.
The term “surrender of a preference” is commonly used in bankruptcy law to describe the action of a creditor relinquishing a transfer, assignment, encumbrance, or conveyance that is deemed voidable. This surrender is typically required for the creditor to be eligible to make a claim in the bankruptcy proceedings. For instance, if a debtor owes money to two creditors, A and B, and transfers a valuable asset to creditor A, this transfer would be considered a preference as it gives creditor A an advantage over creditor B. In the event of the debtor filing for bankruptcy, the trustee can request that creditor A surrenders the asset to the bankruptcy estate. This measure is implemented to ensure fair treatment of all creditors and prevent any preferential treatment. Another example involves a company owing money to multiple suppliers, one of whom is also a shareholder in the company. If this supplier receives a payment shortly before the company files for bankruptcy, it would be considered a preference. In such a scenario, the trustee can demand that the supplier surrenders the payment to the bankruptcy estate, allowing for its equitable distribution among all creditors. These examples effectively demonstrate how the surrender of a preference operates in practical terms. It serves as a mechanism to prevent creditors from receiving preferential treatment and guarantees equal treatment of all creditors throughout the bankruptcy process.
A preference refers to a transfer of property or payment made by a debtor to a creditor within a certain period before filing for bankruptcy. It is considered a preference because it gives one creditor an advantage over others.
Yes, a preference can be challenged in court if it meets certain criteria. The bankruptcy trustee or other creditors can file a lawsuit to recover the transferred property or payment.
The purpose of challenging a preference is to ensure fair distribution of the debtor’s assets among all creditors. By recovering the preference, the bankruptcy estate can be increased, allowing for a more equitable distribution.
In most jurisdictions, a preference can be challenged if it occurred within 90 days before the bankruptcy filing. However, if the preference involves an insider (e.g., a family member or business partner), the look-back period can extend up to one year.
Some common defences against a preference claim include the ordinary course of business defence, contemporaneous exchange defence, and subsequent new value defence. These defences aim to show that the transfer was made in the ordinary course of business or that the creditor provided new value to the debtor after the transfer.
Yes, a preference claim can be settled or negotiated between the parties involved. This often occurs when both parties agree to a compromise to avoid the time and expense of litigation.
If a preference claim is successful, the transferred property or payment will be returned to the bankruptcy estate. It will then be distributed among all creditors according to the bankruptcy laws and priorities.
Yes, if the debtor can prove that they were insolvent at the time of the preference transfer, it may be a valid defence against the claim. Insolvency means that the debtor’s liabilities exceed their assets.
Yes, a preference claim can be filed against a secured creditor if the transfer or payment made by the debtor gave the creditor an advantage over other creditors. However, the secured creditor may have additional defences available to protect their security interest.
If you receive a demand letter for a preference claim, it is important to seek legal advice immediately. An attorney experienced in bankruptcy law can help you understand your rights and options, and guide you through the process of responding to the claim.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 16th April 2024.
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