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What is a preferential payment in bankruptcy?

One of the aims of the bankruptcy code is that all creditors be treated equally. All secured debt should be treated the same, all unsecured debt, and the like. Any time one creditor is given special treatment, there is the potential for a problem (mainly for that creditor).

You Must Disclose Preferential Payments

If you are filing bankruptcy, this means that you cannot pay off one debt and then seek to wipe out (discharge) the rest. The courts enforce this rule by requiring you to disclose all payments to creditors that total more than $600, paid out over the 90 days leading up to the filing of your bankruptcy.

Do you owe money to friends or family? Payments to “insiders” (in any amount) made within one year of the bankruptcy filing also have to be disclosed. Doing this can be difficult, because you don’t want that friend or family member to be hurt by the bankruptcy. But it has to be done.

But There Are Exceptions!

There are exceptions to this, however, which are important to bear in mind. For example:

  • Payments made in order to obtain “new value.” This can be where your child has braces, but they still need to be adjusted and eventually removed by the orthodontist. Or perhaps your small business needs to make payment to a supplier on an outstanding balance due in order to get purchase more goods.
  • Payments made "in the ordinary course of business." If you run a small business as a sole proprietorship and make a routine payment to a vendor, that can be seen as not being a preference.
  • Payments on a bona fide payment of alimony, child support, or some other domestic support obligation.

Ironically enough, if a trustee determines that you did make a preferential payment, then you don’t get into trouble (hey, you disclosed it); the creditor does! The trustee can seek to have that creditor give back the money received, so that it can be divvied up evenly among all of the creditors!

This can be more than awkward, though, if that creditor is a friend or family member. The only consolation is that they do have the right to put in a claim for a fair share of the money returned.

So What Do I Do?

If you live in southern New Jersey and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.

If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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Steven J. Richardson
Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.