Playing Favorites Among Creditors

Most people with several creditors, feel more loyalty to one or two of them than the others. These preferred creditors are often a favorite store, but are more frequently a friend or relative who lent them money. Let's face it,...favorite creditors are more likely to get paid when money is tight.

A problem can arise, however, when such a payment is made on the eve of filing for bankruptcy. Under the U.S. Bankruptcy Code, such a payment may be deemed a "preferential payment" by the bankruptcy trustee if it is made within 90 days prior to the filing of the bankruptcy petition. The trustee, exercising its "avoiding powers", can force the creditor to surrender the payment to the trustee. If the creditor happens to be an individual related to the debtor, or an entity owned or controlled by the debtor, the trustee can go back up to one year prior to the filing of the bankruptcy petition to recover such payments.

The trustee's power to avoid preferential payments prevents a creditor from receiving more of the debtor's property than that creditor would receive in a Chapter 7 bankruptcy proceeding. As a result, such power promotes equality among creditors, and deters creditors from racing to get at the debtor's property before the debtor files for bankruptcy.

Playing favorites among creditors in the days leading up to a bankruptcy filing is a horrible idea. There's no other way to say it. Imagine having to go to your friend or family member, who helped you in your time of need, to ask them to return all of the payments you made in the past year, because if they don't, a bankruptcy trustee will take them to court to recover the payments. This can put a damper on your relationship.

The rules in this area are detailed, and their application can be complicated. Anyone contemplating bankruptcy who wants to pay certain creditors over others should discuss it with their bankruptcy attorney prior to making any such payments.

To coin a phrase,...an ounce of prevention can avoid a pound of avoidance.

Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com