Making or Accepting a Preferential Debt Payment During Bankruptcy

A preferential debt payment is a significant payment made to one creditor while other creditors do not receive the same compensation. During the bankruptcy process, the bankruptcy trustee who is overseeing the bankruptcy case will request documentation showing any payments over $600 made within the last 90 days to six months by the debtor. In some situations, these payments could signal that you are showing preference to one of your creditors over others. The bankruptcy trustee can even demand the creditor return the payment to the courts.

How To Protect Yourself

If you have made a payment, or accepted a payment from a creditor, for $600 or more in the last 90 days, follow these steps to ensure that the court does not require the creditor to repay the funds.

Document the payment on the bankruptcy forms. You will need to fill this in on one of the bankruptcy forms. Do not try to hide the information since the court will likely uncover it and that could lead to the dismissal of your case.
Document what the payment was for. Keep in mind that payments made to standard, monthly payments, such as your mortgage or car payments, will not pose a problem for you during the bankruptcy process, assuming you are current on those loans and plan to continue them after the bankruptcy.
If the bankruptcy does request more information on the payment, explain the payment. In most cases, there will be no questions if you have documented the situation properly. Be sure to explain who the creditor is and what the payment is specifically for when documenting this information.

Keep in mind that a preferential debt payment can go to anyone, even your family and friends. Do not lend money or give money away to your family or friends in the 90 days prior to filing bankruptcy. If this is something that occurs, the courts may believe you are trying to hide assets and may dismiss your bankruptcy case altogether because of the payment.

Hire An Attorney

In order to avoid the preferential debt payment problem, simply hire an attorney. Your attorney will look through your financial records and will question any payments that could be problematic for you. It is also important to be honest and thorough with your attorney so that he or she can offer you the protection you need. By taking the time to hire an attorney, you reduce the chances that your case will be tossed out.

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