If you have made preferential payments, the bankruptcy trustee in your case may “avoid” these payments, meaning that they may require a creditor to return the amount you paid to them. For example, if you owe debts to a family member, you will be prohibited from paying off these debts within one year before you file for bankruptcy. However, this time limit is extended to one year for creditors who are considered to be “insiders” due to a close relationship with a debtor.
Payments made to credit card companies or other lenders are generally prohibited within 90 days before a person files a bankruptcy petition. There are certain time limits that may be used to determine whether payments to creditors were considered preferential.
Generally, a payment to a creditor may be considered a preferential payment if it was made toward a pre-existing debt, the debtor was insolvent when the payment was made, and the creditor received more than they would have received through the liquidation of the debtor’s non-exempt assets in a Chapter 7 bankruptcy. Payments made to one creditor may affect other creditors’ ability to recover what is owed to them, and in some cases, some or all of these payments may need to be returned. However, the bankruptcy laws prohibit preferential treatment of creditors. When preparing for bankruptcy, it may seem to make sense to make payments toward some of your debts and pay off some of what is owed to different creditors. In some cases, these may be considered “preferential payments” that could complicate the bankruptcy process and affect your ability to discharge your debts. One factor that may be considered involves any payments that you made prior to filing for bankruptcy. However, as you prepare to file for bankruptcy, you will need to be aware of certain issues that could affect you. If you are struggling with debts, you will want to determine the options for debt relief that may be available, including bankruptcy.
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