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Preferential Payments in Bankruptcy

What are Preferential Payments?

Preferential payments are payments that may be made by individuals to their creditors before filing for bankruptcy. In most situations, these payments may be taken back by the trustees to evenly distribute them among all the creditors of the individual.

Can Money given as Gift to an Individual be Used as Preferential Payment in Bankruptcy?

In most cases, the money that an individual may have is used to repay creditors after the individual files bankruptcy. If the individual gifts a certain amount of money to someone just before filing for bankruptcy, the trustee may reverse the transaction as a preferential payment and use it to repay creditors. In order to prevent this, the individual may have to wait for a year before filing for bankruptcy after giving away any amount of money as a gift.

Would Money given to an Individual to Pay Off Credit Cards be Considered Preferential Payment?

If the money was paid directly to the individual’s credit card in full, it is likely that it may not be considered to be preferential payments. The payments would normally be considered to be ordinary expenses. However, if the payments were not made directly to the credit cards and were paid to the individual instead, there is a chance that the trustee may consider them to be preferential payments and take it back.

Would Minimum Payments made to Credit Card Companies before Filing for Bankruptcy be considered Preferential Payment?

If an individual is planning to file for bankruptcy, then it may be better for him/her to not make any payments to the credit card companies at all. There is a chance that these payments, even though minimum amounts, can be considered to be preferential payments and taken back. The individual may inform the credit card companies that he/she is filing for bankruptcy and not make the payments at all.

Would Payments made to Auto Loan Companies be considered as Preferential Payments?

In most situations, auto loan companies may be considered to be secured creditors. If the individual wants to keep the vehicle that was bought from the money taken from the auto loan company, he/she may pay the company before filing for bankruptcy. If the individual does not want to keep the vehicle, then he/she may not make the payment as the trustees may think of it as preferential payments.

Would a Payment to a Service Provider be considered a Preferential Payment?

If the payment was made to a service provider in return of any service or goods, then it may not be considered to be a preferential payment. There could be a chance that the service provider may be asked to return a part of the money that was paid. However, the service provider can challenge the claim for the money stating that it was made in return of certain services or goods.

Would Payments made to an Accountant before Filing for Bankruptcy be considered Preferential Payments?

According to Bankruptcy Statute 547(b), payments made to an accountant before filing for bankruptcy may not be considered preferential payments if the individual filed for bankruptcy within 90 days of making the payment and if the debtor’s total assets were less than his/her total debts.

Would Money Owed by a Parent to a Child be Considered Preferential Payment?

If the money owed by the parent to the child was paid to the child just before the parent filed for bankruptcy, then it may be considered preferential payment. The trustees could ask the child to return the money so that they can distribute it among all the creditors.

Knowing what preferential payments are and what may be considered a preferential payment can help individuals when filing for bankruptcy. Knowing the rules around preferential payments will also help individuals decide the right time to file for bankruptcy.
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