Preferential treatment of creditors before filing for bankruptcy is a bad idea. It can cause serious problems in your case, and can even cause your bankruptcy case to be open for longer and cost significantly more in attorneys fees.
You want to avoid giving one creditor preferential treatment over another one.
Preferential Treatment Explained
Preferential treatment is payment on a debt or transfer of property made for the benefit of certain creditors over others shortly before filing for bankruptcy.
Some people filing for bankruptcy have certain debts they would prefer to pay back, or would prefer to pay back before others. Often we see this when a person wants to pay back friends or family for money they borrowed before filing for bankruptcy. Do not pay back your friends or family before filing for bankruptcy. It may cause more problems than it’s worth.
When Debt Payments Are Considered Preferential in Bankruptcy
The look-back period on preferential treatment of most creditors is 90-days prior to filing for bankruptcy. Payments that meet the following three criteria are preferential payments:
- Total over $600, aggregate, to a creditor in the 90-days prior to filing bankruptcy;
- Made while you were insolvent (your debts were higher than your assets); and
- The payment(s) gave the creditor more than it would have otherwise received in your bankruptcy.
Payments made to so-called insiders, which includes your friends, family, business partners, basically anyone with whom you have a personal connection, are more heavily scrutinized in bankruptcy. The above criteria apply to insiders, but the look-back period is a year instead of only 90-days.
Consequences of Preferential Treatment of Creditors
Preferential payments or transfers are not illegal on their face. Though, they are illegal when done with the intent to defraud creditors, hide money, or conceal assets. Even though preferential payments are not illegal if preferential treatment is discovered the preferred creditor may have to return the money or asset.
The bankruptcy trustee assigned to your case has the power to avoid (to reverse) the preferential payment or transfer. Effectively this means the trustee could seize funds from the friend you paid back prior to filing for bankruptcy.
If you live in Savannah, GA or the surrounding areas and have questions about your debt relief options, let’s meet for a free consultation. Please reach out to us at (912) 351-9000 or contact us by filling out this simple web form.
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.