Preference sounds good, right? Maybe, maybe not.

If you pay your taxes or court ordered child support before paying other creditors, that’s okay. If you make your house mortgage payment or auto payment before paying your Visa bill, that’s okay. So, what is a preference payment? What can’t I do?

Insider Preference Payments

Friends and relatives are considered to be insiders because they are closer to you than most creditors. Within one year before you file for bankruptcy, you can’t pay your mom back the $2,000 she loaned you before you pay the Visa bill.  It is considered a preference payment and the trustee can have it set aside. In other words, the trustee can sue your mom to recover that $2,000 payment.

Why can they do that? Because it is considered unfair under the U.S. Bankruptcy Code. The code is concerned with fairness to all parties; it is the overarching principle that guides the code. Fairness to you the debtor and to all the creditors that you owe money to.

You can’t make any preferential payment to a friend or family member in the year before filing bankruptcy or the trustee can recover it and will be likely to go after your friend or family member.

In that one-year period before filing for a bankruptcy, be careful of repaying your:

  • Aunt
  • Uncle
  • Sister
  • Brother
  • Brother-in-law
  • Sister-on-law
  • Cousin
  • Niece 
  • Mother
  • Father
  • Any other relative
  • Friend

Your brother would likely be upset to find out that the money you gave him to repay your loan will be taken by the trustee. Either wait to file the bankruptcy so a full year passes, or wait to make the payment until after the bankruptcy case. There is nothing in the law that stops you from paying back a loan after it has been discharged in bankruptcy. As long as you wait, you can repay anyone you want to.

What About Other Creditors?

Any payment over $600 to a credit card company or other creditor (medical provider, personal loan, other loans) within 90 days of filing bankruptcy is also a preference payment that can be set aside. It is considered unfair to pay one creditor but not all of them.

A preference payment doesn’t have to be cash, check or money. It can also be a transfer of your property. For example, you owe your sister some money and she agrees to accept your bicycle in trade. Talk to a knowledgeable local bankruptcy lawyer about your payments. They’ll ask you questions and dig into your facts so you can avoid any unpleasant surprises.

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Image Credit: Leo Reynolds