What is Preferred Creditor? Definition of Preferred Creditor, Preferred Creditor Meaning

Definition of Preferred Creditor

The preferred or privileged creditor is the one who has a greater right of collection. This, in case the debtor suspends payments or announces its bankruptcy and begins a liquidation procedure of its assets.

Having the preferred category is very important to the lender . This, mainly if the debtor lacks sufficient resources to pay all his creditors .

We must take into account that in principle all lenders are in an equal position. This rule is known in civil law as CONDICTIO CREDITORIUM.

However, as we mentioned earlier, the debtor does not always have the necessary funds to meet all of its financial obligations.

Characteristics of the preferred creditor

Among the characteristics of the preferred creditor are:

• Priority: The preferred creditor will collect the debt before other lenders of the same debtor.
• Legality: The condition of privileged creditor is contemplated in the legal framework. It establishes in detail, for example, the order in which the assets must be distributed among the shareholders . This, in case a company goes bankrupt.
• Protection: The purpose of giving priority to one creditor over another is to privilege certain needs and avoid being unprotected. This is observed, for example, in the case of workers to whom a bankrupt company owes wages. They have preference over other creditors.

Criteria for choosing the preferred creditor

There are two criteria to determine if a creditor is preferred:

• Guarantee : If the creditor has rights to a seizable asset of the debtor. It can be, for example, an object given as a pledge or a mortgage, which must be used to pay a particular lender.
• Legality: The law establishes the priority in the order of payment to creditors, with different nuances in each country. In this way, a privileged place is normally given to the payment of the payroll and the collection of taxes.