Preferences In Bankruptcy

Prior to filing a bankruptcy, you have to disclose any payments you’ve made to creditors over the last 90 days, totaling over $600.00. The reason for this requirement is that the bankruptcy court wants to be sure one creditor hasn’t received more than its fair share over another creditor, as bankruptcy was approaching. Clients often forget that payments to family and friends, or “insiders” count, when answering this question.

The Importance of Payments To Creditors

Generally, the worst case scenario if a payment is determined by the bankruptcy trustee to be a preference, is that the trustee demands the money back from the creditor, and re-distributes it to all creditors equally, based on their debts with the person who filed bankruptcy. If you’re the individual who filed, you typically don’t care if this occurs. Unless it’s a family member or friend.

Payments To Insiders

Family members and friends are considered by the court to be “Insiders”, and therefore payments to these individuals have a longer look-back period. If you make a large payment to these individuals within the look-back period, these are known as preferences in bankruptcy. Furthermore, if the trustee seeks return of a payment to your mom or your best friend, you may have just upset an important relationship in your life. The previously mentioned timeframe of 90 days increases to one year if the creditor is a family member or friend.

Options For Preferences

One option is to have the creditor (mom, friend, etc) return the payment prior to filing the bankruptcy. This puts the money back into the debtor’s estate, and eliminates the argument that one creditor was paid more than another. The next step would be for the bankruptcy attorney to exempt that money now that it’s back in the estate. This is typically done by using the wild card exemption.

Another option is to wait out the applicable look-back period. Again, for family members and friends, this is typically one year; however, a trustee may make the argument that the transfer was fraudulent, which could dramatically extend the look-back period.

Call An Attorney

There is nothing wrong with making a preferential payment. If you have questions about how to manage payments to family and friends, or about the timing of filing bankruptcy, call 704.749.7747 today to speak to an attorney. We’re here to help you recover financially.