Bret Nason

Attorney at Law

Bret Nason

Attorney at Law

What Are Preferences, and Why Should I Care?

Most people don’t have to care about preferences. They are defined under 11 U.S.C. §547. Short version, a preference is any transfer made to or for the benefit of a creditor (someone you owe money to) on account of an antecedent debt owed by the debtor before such transfer was made (non-legalese: for a debt you owed before you made the transfer), made while the debtor was insolvent, made within 90 days before the date of the filing of the petition (for typical creditors) or one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider (usually a family member or close friend); and that enables such creditor to receive more than such creditor would receive if the case were a case under chapter 7 of this title, and the transfer had not been made.

Short version, if the creditor got more than he/she would have received if the petition had not been filed, it’s probably a preference.

Preferences can sometimes be beneficial to my clients, and sometimes hurt them (or their family members.) If the preferential transferee is a garnishing creditor, a good attorney may be able to get some of that money back. If it’s a family member, a good attorney will tell you how to protect that family member from getting sued by the panel trustee.

The issue usually comes up in two scenarios:

1- debtor has his wages garnished for a few weeks that total $800. A good attorney should be able to get that $800 back for the debtor.

2- debtor got a $5000 loan from Mom and then gets a $5000 tax refund. Debtor gives all $5000 to Mom.

Both of those are preferences, because the creditor got preferential treatment. In other words, this creditor got paid while other creditors similarly situated didn’t get paid.

In the case of the garnishing creditor, it can work in the debtor’s favor. If the total was more than $600 in the 90 days prior to filing the bankruptcy, the debtor may be able to get it returned. Make sure to tell your attorney about the garnishments, because there are certain steps the attorney must take to get the funds returned.

In the case of paying Mom back, the court will say, that wasn’t fair. You owed a whole bunch of people money, and you preferred one creditor (your mom.) The trustee will sue your mom, get the $5000 back, and distribute it to your other creditors.

Lesson to be learned: don’t pay your folks back shortly before filing bankruptcy. I can probably help you fix that problem, but it’s easier (for me) and less expensive (for you) to avoid a problem rather than fix it.

That’s the layman’s version of preferences. They come up far more than consumer bankruptcy attorneys like, but there’s usually a way to protect Mom from getting sued. All you need to do is be honest with your lawyer. And don’t try to fix these without getting competent legal advice.

Image credit: Travis Essinger/Unsplash


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