Preference Payments (and Why You Should Avoid Them)

When you are going through tough financial times, it is normal to borrow money from family and friends.  Although you might be tempted to pay family and friends back, if you are considering filing bankruptcy, the repayment might be short-lived.  Unfortunately, the bankruptcy court treats family and friends the same as any other creditor.  The bankruptcy court may rule your repayment to your family and friends as a preferential payment.  Depending on the amount, the court may deem the repayment to your family and friends as unfair to your remaining creditors.  Therefore, it is important to work with a bankruptcy attorney before making any payments to any creditor, including friends or family.

What is a Preference?

A preference does not refer only to payments made to friends or relatives.   Rather, a preference is:

  • Any payment or transfer of property worth more than $600 made on a previously-existing debt
  • Within ninety (90) days of filing bankruptcy to non-insider creditors
  • Within one (1) year of filing bankruptcy to insider creditors.   An insider creditor is normally defined as one who has an existing relationship with such as family members, friends and business associates.

Like the name indicates, a preference is a payment that favors one creditor over another.  The bankruptcy code considers this fundamentally unfair because all creditors should be treated equally.

As such, the code gives the bankruptcy trustee the authority to reach back over time and reverse unfair payments.  This puts all creditors on a level playing filed and ensures money is distributed in an equitable manner.  If you have recently paid back a friend or family member, the bankruptcy trustee has the right to pursue them to reclaim the money.

What is an Improper Transfer?

Along the same lines of preference payments are preferential, or improper transfers of property.  It is common for family members to be represented on titles and deeds of property.  Potential bankruptcy filers have to be aware of the property that is titled in their name, as all titled property will have to be included in disclosures for the bankruptcy court.  Any transfers of property within two years of the bankruptcy filing will come under the scrutiny of the bankruptcy trustee.

For example, it is often required for a parent to be added on a car title for their minor child.   As the minor child comes of age, the parent will remove their name from the title.  Unfortunately, this is deemed a transfer of the parent’s interest in the vehicle.  If this transfer was completed within two years of the filing of the bankruptcy, the bankruptcy trustee would have the right to invalidate the transfer, and claim the parent’s interest in the vehicle.

Bankruptcy laws are complex.  There are many steps that can be taken to avoid issues arising from Preferences and Improper Transfers.  An experienced bankruptcy attorney can help you explore your options and avoid pitfalls such as these.

Patton & Knipp — Kansas City Bankruptcy Law Firm

Contact the bankruptcy lawyers at Patton & Knipp to discuss your bankruptcy options.  Patton & Knipp is home to the complete bankruptcy.  We have offices in Lenexa, Independence, Gladstone and Emporia, serving clients throughout the Kansas City Metro in both Missouri and Kansas.


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