Preferential Transfers

We frequently have clients who want to pay back a loan from a favorite credit union, bank, friend, partner or family member before filing for bankruptcy. This is not a good idea! Repaying a loan right before filing is considered a “preference” that is, it allows the person or business repaid to receive more than other creditors will get after the bankruptcy is filed.

This is why you may have heard that you are not supposed to pay your unsecured debts right before filing bankruptcy. Unsecured means that there is no collateral for the debt. So it is perfectly OK to pay a legitimate car loan or mortgage right up to the bankruptcy filing assuming that you are keeping the car, house or other collateral associated with the debt. But, in a consumer case, you should not pay back a credit card, medical bill or other unsecured debt more than $600 in the 90 days before filing the bankruptcy and you also should not repay unsecured loans from friends, family or partners for a FULL YEAR prior to filing the bankruptcy. If you do, the Chapter 7 Bankruptcy Trustee may well be able to recover those payments back from the person you gave them to! The idea is that the trustee will get the money back and distribute it more fairly after first deducting the trustee’s fees and expenses for doing so! As you might guess, it is unlikely that a Chapter 7 bankruptcy is going to bother going through this fairly complicated and lengthy procedure just to recover a few hundred dollars. But if there is enough money involved, be prepared to have the very people that you were trying to protect from the bankruptcy get caught right up in the middle of it!