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Preferences in Bankruptcy Law



A preference is a payment made on a existing debt that the trustee in your bankruptcy case can get back from whomever you paid. The preference period is 90 days for most creditors but is 1 year for family members and other “insiders.” The typical scenario for a preference is that a person who is struggling pays their grandmother back the $2000 she lent you last year and then goes to file a bankruptcy case.  You have done nothing wrong, and neither has your grandmother but the law identifies this as a situation where one creditor (grandmom) got money within a certain time and where your other creditors (credit cards) go no money. So the trustee can get that money back and split it up evenly between all creditors.

11 U.S.C. Sec 547 is the preference provision in the United States Bankruptcy Code and here are the provisions:

Except as provided in subsections (d) and ( c) of this section, the trustee may avoid any transfer of an interest in debtor’s property

    (1) to or for the benefit of a creditor
    (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
    (3) made while the debtor was insolvent;
    (4) made
        (A) on or with 90 days before the filing of the petition
        (B) between 90 days and one year of the filing of the petition, if such creditor was at the time of such transfer an insider, and

    (5) that enables such creditor to receive more than such creditor would have received if
        (A) the case was a case under Chapter 7 of this title.
        (B) the transfer had not been made, and such creditor received payment under the provisions of this title.

....exceptions-

(8) if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that (is transferred) is less than $600.

So in general you look at the payment(s) over $600 to a creditor, a person who is owed money within 90 days or one year (if a family member or other insider) for or on account of an existing debt (it cannot be a payment to a dentist for work done that day for example) that allows the creditor to get more than it would get if a 7 was filed . (which is normally nothing.)

There are a number of ways to avoid preferences to creditors with planning in a bankruptcy case. In addition even if there is a preference, the debtor(s) can usually step in to protect the transferee by paying the money to the trustee over time. The trustee in your case would much rather get the money from you than go after grandmother or some other innocent party who may have long since spent the money.