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Read This Before You Pay Your Aunt Millie

bankruptcy preference introductionWhen I was a kid, my mom had a rule that I had to bring a gift for every child in the house when invited to someone’s birthday party.

Her reasoning was that it was unfair to give a present to one child but not to his or her siblings. It sounded dumb at the time, but I’m an only child so the notion of inter-sibling unfairness never rang my bell.

Turns out, my mother would have made an excellent bankruptcy lawyer.

The U.S. Bankruptcy Code is designed for fairness among all parties, both the debtor (that’s the one who owes and money) and the creditors (the people to whom money is owed). Creditors are treated differently based on certain priorities, but within each grouping the creditors must be treated exactly the same.

Think of it as a balancing act. There’s a little bit of give-and-take among everyone. The end result is that everyone walks away with a little of what they want – but not everything.

Here Comes Aunt Millie

When you pay back money to a friend or family member, you’re repaying a debt. That’s not a problem unless you make a payment within one year of the filing of your bankruptcy petition. Such a payment is called a preference, and your bankruptcy trustee can avoid it.

What About Payments To Other Creditors?

Under the bankruptcy laws, a preference can be a payment made to ANY creditor (credit card, medical bill, personal loan – even a student loan) within 90 days of filing for bankruptcy.

Transferring Property As A Preference

Under the law, a transfer of your property as payment on a debt can be considered a preference if it’s within the applicable time period. That doesn’t just mean real estate or a car, either; property is any of your “stuff.”

If you owe money to one of your friends and decide to give him or her your television set as payment, that could be a preference.

If you owe money to your doctor and give him a lien on your house to secure payment, that’s an interest in your property that could be a preference.

How To Avoid The Preference Issue In Bankruptcy

In my bankruptcy practice, I spend quite a bit of time going through recent payments with my clients.  Knowing who’s been paid, who got a lien, and who started to enforce a judgment helps my clients plot out the course of their bankruptcy case.  If you’re looking for a lawyer who’s going to do a complete job for you, make sure he or she knows the lay of the preference land inside and out.

Image credit: kevin dooley

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By |March 26th, 2012|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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