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The bankruptcy process
Preference
A payment to a creditor shortly before a bankruptcy filing that gives that creditor more than it would receive in a Chapter 7 case, and that the trustee may be able to undo. 1
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A Chapter 7 trustee may try to recover money or property under what are called avoiding powers. One of them is the power to set aside preferential transfers made to creditors within 90 days before the petition. 2
A payment or other transfer is a preference when it was made to or for the benefit of a creditor, on a debt that was already owed, while the debtor was insolvent, and it lets the creditor receive more than it would in a Chapter 7 case. The look-back period is 90 days before the filing. It is one year when the creditor is an insider. 1
Insiders include relatives, a general partner and a corporation the debtor controls. The debtor is presumed to have been insolvent during the 90 days before the filing. 3 1
There are exceptions. The trustee may not undo a bona fide payment of a domestic support obligation, and in a consumer case transfers below a dollar threshold set in the statute are protected. The statement of financial affairs asks about transfers of property, so payments made before filing are disclosed there. 1 4
Common questions
I repaid a relative before filing. Is that a problem?
Can child support payments be undone as preferences?
No. The trustee may not avoid a bona fide payment of a domestic support obligation. 1
Sources
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