What is a preference in bankruptcy?

• A. A type of bankruptcy filing.
• B. A payment made by the debtor to one creditor over another within a certain period before bankruptcy filing, which may need to be returned.
• C. A court-ordered debt forgiveness.
• D. A legal exemption for secured creditors.

Answer: (B)

A preference in bankruptcy is a transfer of value from the debtor to a single creditor made shortly before filing, which gives that creditor more than they would receive if the debtor’s assets were distributed under bankruptcy. This is problematic because it lets one creditor jump ahead of others at the expense of the estate. The bankruptcy trustee can unwind the transaction, requiring the creditor to return the amount to the estate so all creditors are treated more equally.

Key points to understand: the transfer occurs within a defined look-back period (typically 90 days before filing, or up to a year if the recipient is an insider), and it must be an antecedent debt (not a new debt incurred just before filing). The purpose is to prevent the debtor from favoring one creditor, preserving the value of the estate for all creditors.

The other options describe different concepts: a filing type, debt forgiveness, or exemptions for secured creditors, none of which capture the idea of a pre-filing payment that may need to be returned to protect fair treatment of creditors.