What you need to know about preferential transfers

Although you may want to pay off one creditor over another before you file bankruptcy, this is generally not a good idea.

If you are behind on your debts, you may be tempted to pay off one creditor over another, for a multitude of reasons that are personal to you. For example, a family member may have given you some cash to help you through your tough financial times. Because of this kindness, you may want to ensure that your family member is paid in full before your other creditors. Although your family member may thank you for your repayment, if you later file bankruptcy, this type of transaction may be voided as a preferential transfer.

What are preferential transfers?

Under the bankruptcy laws, you as the filer are required to treat your creditors equally. As soon as you file Chapter 7 or Chapter 13, the bankruptcy trustee will examine all of your transactions that occurred during a certain period before the filing date. The reason for this is to determine whether you made any preferential transfers.

Preferential transfers occur when bankruptcy filers significantly favor one creditor over another. In some personal bankruptcy cases, a favored creditor is a family member. However, virtually any creditor receiving preferential treatment qualifies. The bankruptcy code defines a preferential transfer as:

· A transfer to a creditor made because of a debt owed;

· Occurring within 90 days before the bankruptcy filing date (one year if the creditor was an "insider");

· Made while the filer was insolvent (this is presumed during the 90 days before the filing date);

· That allowed the creditor to receive more than they would have received, if Chapter 7 were filed.

During Chapter 7 bankruptcy, virtually all creditors (except secured ones) receive little or no repayment. Because of this fact, any significant repayment of a debt made within 90 days of filing date may be considered a preferential transfer. However, if you made a payment to an "insider"-defined under the code as including family members and business associates-any preferential payment made within a year will possibly qualify as a preferential transfer.

The bankruptcy laws empower the trustee to force creditors receiving preferential transfers to repay the amount they received to the bankruptcy estate. Once part of your estate, any recovered transfers are distributed to your creditors as the law dictates.

Fortunately, the law has several exceptions to this rule. Under the law, payment for certain personal expenses such as alimony, child support and other expenses for domestic support are not considered to be preferential, regardless of the amount. Additionally, most other transfers to creditors that have an aggregate value of $600 or less are generally exempt as well.

If you are struggling with debt, it is important to have the guidance of an experienced bankruptcy attorney well before you actually file. An attorney can review your circumstances and work to ensure that any problems are addressed at an early stage.

Keywords: bankruptcy, preferential transfers