Preferential Payments In Bankruptcy

Since a chapter 7 bankruptcy is a liquidation of assets (though I've said before that in many cases, there is nothing to liquidate so no need to panic), part of our bankruptcy code includes rules for preferential payments. It is imperative to understand what preferential payments in bankruptcy are as well as several simple rules that govern them.

For bankruptcy, preferential payments are debt payments made to a creditor prior to filing a chapter 7 bankruptcy that gives one creditor more than they would receive in your chapter 7 bankruptcy while other creditors get less (or nothing). The preference period is the 90 days prior to filing for most creditors.

You may want to pay off one creditor prior to filing in hopes of retaining that account after the discharge. (Most creditors will close your account anyway after you file, even if you owe them nothing, so trying to keep an account alive is usually futile.)

For example, you pay off creditor X right before filing but pay nothing to Creditor Y. You have given creditor X a preferential payment and the court could demand that creditor X return those funds to the bankruptcy estate so that they can be equally divided amongst all creditors.

The preference period goes back an entire year if the payee is an insider. Insiders are friends, family members, etc.

You may understandably want to pay off a friend of family member that you owe money to prior to filing so that you don't have to include them in your bankruptcy. But, just like in the case of regular creditors, the trustee can go after any preferential transfers made to insiders. And, as I already stated, because the payee is an insider, any preferential payments going back an entire year can be seized.

For advice concerning preferential payments or a preference payment specific to your case, please consult with your attorney.

Good luck to all,

ep