Preferential Payments In Bankruptcy

Often times, when people find themselves in financial trouble, they turn to their close friends, significant others or family members for help.  Although this is generally not a problem, borrowing money from these sources could create a problem if the person who borrowed the money has to end up filing for bankruptcy.  When an individual files for bankruptcy their case is assigned a trustee.  One of the trustee’s jobs is to represent the rights of the creditors during the course of a bankruptcy.  As part of this job the trustee collects money or assets that are not exempt and uses those to pay off creditors.  This can be a problem if a friend or family member was paid off instead of other creditors.  The trustee treats all creditors the same, and paying one in this fashion over another instead of by priority can be seen as a preferential payment.  Arizona state laws cannot change the priority nor can they disregard the order of priority.  Once priority is established, meaning during the process of lending whether the creditor is secured or unsecured, that priority is kept unless the court grants a de facto priority in order to achieve a legal solution.

Preferential Payments

Preferential payments, as the name implies, are payments made to one party in exclusion of another.  These payments can take several forms.  An individual planning on filing for bankruptcy could pay of the balance of one $5,000 credit card.  If the trustee wanted, they could require the credit card company to turn over those funds and then pay all the creditors off equally in order of priority.  If however, that same $5,000 went to the individual’s brother, the court will look at this as a preferential payment to an insider.  This is true even if the loan from the brother was valid.  This is more of a problem than the first case because now the individual is going to have to pay the bankruptcy estate (for which there is not likely to be funds available) or the brother is going to have to turn over the funds (which in most cases have already been spent).  This causes a scenario where a friend or family member who was nice enough to loan you money is now responsible for paying back those funds to the bankruptcy estate.  It goes without saying that this is not a position you want to find yourself in as a personal relationship could forever be affected.

What To Do

An experienced attorney knows the bankruptcy code and the appropriate rules about disclosing preferential payments and other transfers of money or property.  The most important thing to do will be to inform your attorney of all transfers of money or property so they can advise you on the appropriate course of action.  This is necessary in order to avoid having the trustee find out after your petition is filed and then it is too late to do anything about. 

Phoenix Bankruptcy Lawyer

Our Arizona bankruptcy attorneys at Platt & Westby, P.C., charge reasonable flat fees to file personal chapter 7 and chapter 13 bankruptcies. Our firm is so experienced in bankruptcy, that we were recently voted "Best Bankruptcy Law Firm for 2013" by Arizona Foothills Magazine.  Contact our office or call 602-277-4441 to schedule a free consultation with one of our experienced Arizona bankruptcy attorneys today.