Preference sounds good, right? Maybe, maybe not. If you pay child support or taxes before paying other creditors, that’s okay. If you make your house or car payment before paying your Visa bill, that’s okay. So what can’t I do?

Insider Preference Payments

You can’t pay your mom back that $2,000 she loaned you before you pay the Visa bill, if you do it within one year before you file for bankruptcy. It is considered a preference and the trustee can set it aside. In other words the trustee can sue your mom to recover the $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 all around. 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. So be careful of repaying your uncle, sister, brother, mother, father or friend in the one year period before filing for a bankruptcy. 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.

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.

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 a friend some money and they agree to take 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