Preference Payment
Definition
A payment made to a creditor within the statutory preference period (typically 90 days before bankruptcy filing, one year for insiders) that gives that creditor more than it would recover in a liquidation. The trustee can reverse preference payments and return funds to the estate.
- Standard lookback period
- 90 days before filing
- Insider lookback period
- One year before filing
- Effect
- Creditor receives more than liquidation share
- Remedy
- Trustee can reverse the payment
Common questions
Why does bankruptcy law allow a trustee to claw back a lawful payment?+
The policy goal is equal treatment of creditors: a payment made shortly before filing, even if it satisfied a genuine debt, can unfairly favour one creditor over others who would otherwise share the estate proportionally, so the law lets the trustee recover it for redistribution.
What role does a forensic accountant play in a preference-payment analysis?+
A forensic accountant traces the debtor's payment history against the statutory lookback window, identifies which creditors received payments during that period, and calculates whether each payment left the creditor better off than it would have been in liquidation, supporting the trustee's recovery action.
Related terms
- Bankruptcy Examiner
- An independent investigator appointed by the court in a bankruptcy case to investigate specific matters such as fraud or mismanagement. Unlike a...
- Clawback (Avoidance Action)
- A lawsuit brought by the trustee to recover assets or payments that left the estate before bankruptcy. The trustee's avoidance powers are...
- Fraudulent Transfer (Fraudulent Conveyance)
- A transfer of assets made with intent to hinder, delay, or defraud creditors, or made for less than reasonably equivalent value while...
- Ponzi-Scheme Insolvency
- An insolvency where the debtor operated a Ponzi scheme: early investors received returns paid from later investors' capital rather than genuine investment...
- UNCITRAL Model Law
- The UNCITRAL Model Law on Cross-Border Insolvency (1997), a template for coordinating insolvency proceedings across borders. Countries that adopt it (including the...