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You Cannot Make Preferential Payments to Creditors 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).

When Is There a Preference?

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. There are exceptions to this rule, so find out more here!

What Happens If There Is?

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.

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