Preferential Payments in Bankruptcy

Posted in: Before Filing

The period of time before you file bankruptcy can be just as important as the time afterwards.  For example, you plan to file bankruptcy on September 1.  You meet with your bankruptcy attorney and she asks you about any preferential payments you have made recently.  She explains that preferential payments are payments to any one creditor that totaled $600 or more in the last 90 days.

You remember that you opened a line of credit at Jumbo’s’ Fireworks on July 1 and charged $1,000.00.  Satisfied with your July 4 fireworks display, you pay off your line of credit in full on July 15.  Jumbo’s accepts your payment and is happy that, despite the rain, they have enjoyed another profitable holiday.

The U.S. Code states that a trustee may avoid (set aside) any transfer made by the debtor within 90 days before the date of the filing of the petition over $600.  This power is given to the trustee to ensure that, to the extent possible, unsecured creditors are treated “equally” in a bankruptcy.  Equality would not be achieved if Jumbo’s received full payment but your other unsecured creditors (credit card issuers, medical service providers) received nothing.

Plainly speaking, Jumbo’s may be out of luck – they could be asked to return your payment to your bankruptcy estate.  Or, the trustee could ask you for the property. Which wouldn’t work out very well in this hypothetical scenario.