When you file for bankruptcy, the Court appoints a Trustee to administer your case. Trustees investigate whether you have preferred one creditor over another. The first thing the Trustee looks at is whether you have made payments to any one creditor totaling $600 or more over the 90 days’ prior to filing for bankruptcy. Two examples will help to explain what this means. Example one, you paid $100 to each one of twelve creditors in the 90 days’ prior to filing for bankruptcy. $1,200 is more than $600, but you did not pay $600 or more to any one creditor. That example is fairly intuitive, but the following example is somewhat less intuitive. Example two, you paid Creditor X $200 in month one, $200 in month two, and $200 in month three. Although you may think you never paid Creditor X more than $200, this totals $600 or more over the 90 days’ prior to filing for bankruptcy.
If you paid less than $600 to a creditor over the 90 days’ prior to filing for bankruptcy, that is not considered a preference. But I would urge you to also read my articles entitled “Avoid transferring property Before You File For Bankruptcy” and “Can I Pay Back Family Members For Money I Owe Them Before I File For Bankruptcy.” Although those two situations are not the same thing as a preference, they also can have a serious impact on your bankruptcy if you fail to take the appropriate measures.
If you have paid $600 or more to a creditor over the 90 days’ prior to filing for bankruptcy, the Trustee looks at what type of payments you made to the creditor. Your monthly mortgage payments may very well total $600 or more over the three months’ prior to filing bankruptcy, but that is not a preference. If you rent your residence, your regular monthly rent payments are also not considered a preference. Your regular monthly payments on a vehicle purchase or a vehicle lease are similarly not considered preferences. Your monthly payments on your heat bill may be greater than $600 during the winter months, but if the payments are for ongoing usage rather than for past-due payments they generally will not be considered a preference.
Other than the types of payments mentioned above, payments to a general unsecured creditor over $600 within the 90 days prior to filing for bankruptcy are likely to be considered a preference. For an explanation of unsecured creditors, see my article entitled, “The Difference Between Chapter 7 and Chapter 13 Bankruptcy, and Which Chapter is Right For You.” Trustees absolutely do police the issue of preference payments. Chapter 7 Trustees have an economic incentive for detecting and redistributing preferential payments to a creditor. In a Chapter 13 repayment bankruptcy, preferential payments you have made to a creditor could affect how much you have to repay to the rest of your creditors. For an explanation of Chapter 7 bankruptcies and Chapter 13 bankruptcies see my article entitled, “The Difference Between Chapter 7 and Chapter 13 Bankruptcy, and Which Chapter is Right For You.”
You want to avoid making preference payments before you file for bankruptcy, if possible. If you have preferred one creditor over another the Trustee has the power to take the money back from the creditor and redistribute a percentage of the money to each of your creditors. You may not care if the credit card company has to pay to the Trustee the money they received. But knowing that will happen, if you are sure you are going to file for bankruptcy you have no incentive to throw your money away when you could keep the money to help you rebuild your capital cushion while at the same time eliminating your debts.
The above information is a general overview and is not intended to be used as legal advice. If you are considering filing for bankruptcy, the best thing to do is call our office at 248-557-3645 and schedule a free consultation so you can receive advice which is tailored to your specific circumstances.
By: Michael Benkstein, Esq.
Managing Attorney, Bankruptcy Department
The Law Offices of Joumana Kayrouz, PLLC