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  • Writer's picturePeter Bricks

What is a “Preference” in Bankruptcy?

Updated: Feb 8, 2023

One of the questions on the Statement of Financial Affairs on your bankruptcy petition asks if you have paid any creditor more than $600 in the last 90 days before filing your case. Many debtors want to know why that is important. The reason the court wants to know is because they want to see if you have preferred any creditors.

It is important to note that some preferential payments are okay and the trustee will not seek to recover. Payments for ongoing services and benefits (like a mortgage or car payment) are not recoverable. Payments for a contemporaneous exchange of value for services (example: paying an accountant to do this years taxes) are not recoverable. It is the payment for past due services where the debtor receives no new value (example: Your closed credit card with Visa) that are recoverable.

Let’s say you have decided to pay American Express $1,000 one month before filing, while giving $0 to Discover Card. If you did that, then you have made a preferential payment to American Express. Or perhaps you paid back the $4,000 you owed your Uncle Bob two months ago. In that case you would have also made a preferential payment, this time to Uncle Bob. Note that in Bobs case the look back is one year, rather than just 90 days, because his familial relationship makes him an insider.

While it might be easy to grasp the problem in paying your Uncle at the expense of your other creditors, (while at the same time mind you also reducing the money in your checking account that you hope to exempt from your bankruptcy trustee) it was no less problematic of a payment as was the American Express payment. It is not even relevant that maybe your American Express payment was a minimum payment, or made as an attempt to avoid bankruptcy, whereas the payment to Bob was purely done out of self-interest.

In both scenarios your bankruptcy trustee can attempt to recover the money from the recipient. The recovery would then go to the debtors bankruptcy estate to be distributed evenly among the debtors creditors. The debtor cannot recover the money from the recipient, since the debtors payment was voluntary.

So while the debtor might be thinking he/she was doing a family member a favor or being crafty on the eve of filing, the debtor might find out he/she did more harm than good by paying a relative so close to filing. The relative could spend the money then find themselves as a defendant in a lawsuit against the debtors trustee for the full amount of the payment.

Unlike the voluntary transfers discussed above, involuntary transfers can be recovered by the debtor in the event the debtor has enough exemptions to keep the asset. If the debtor does not have enough exemptions, then the trustee can claim it for the bankruptcy estate.

A classic example of when this comes into play is when the debtor has been garnished by a creditor or the debtors bank has setoff funds from the debtors account within the 90 days before filing in excess of $600. Even though the debtor did not wish to make these payments, the fact is the money was given from the debtor to a creditor within the 90 day preference window.

Therefore, if the debtor has had $1,000 garnished 83 days previous and the debtor is trying to get the bankruptcy petition ready, the debtor must file the case in the next week to have any chance of recovery against the garnishing party. Again, if the debtor has enough exemptions to keep the funds, the debtor will get to do so, and the money will not be paid to other creditors. This alone can sometimes pay for the debtors attorney and filing fees in a case.

All of these examples above illustrate a key point- dates matter in bankruptcy. If the debtor does things it should not do before filing , then the debtor might need to wait to file the case. Conversely, the debtor can sometimes take advantage of the preference window to recoup funds.

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