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L.A. Bankruptcy: Preferential Payments Prior to a Los Angeles Chapter 7

August 19, 2012

Often, we get bankruptcy clients who come to us just before they plan to file for a Chapter 7, only to have it later revealed that they made payments in the last few months, which they will now be responsible for paying back to the bankruptcy trust.

Los Angeles Chapter 7 Bankruptcy Lawyer Vincent Howard
wants potential clients to understand that this action falls under 11 U.S.C. 547, and it's called a preferential payment. currency.jpg

Here's one example:

You are planning to file for Chapter 7, but you have a credit card you believe you can pay off between now and then so that it won't have to be included in the filing. If we're talking about anything under $600, you may skate. However, if it's over this amount and you do so within three months prior to your filing, it could be considered preferential payment.

Another example:

You are planning to file for bankruptcy, and you owe your brother a few thousand dollars from a loan he gave you. In this case, you have to disclose any payments made to him in the 12 months before filing. If you pay him to the detriment of your other creditors, this is considered a preferential payment - and it's exactly the kind of scenario that the statute was designed to prevent.

Your family members, close friends, etc. - they are considered "insiders," and U.S. Bankruptcy Code is particularly strict about preventing preferential payments in these cases when you aren't keeping up on your other bills, which you intend to then have wiped out in a Chapter 7.

From a legal standpoint, the reasoning is clear. All of your creditors have to be treated the same. You can't pay your mom what you owe her and then stiff the credit card company (even if you may sometimes feel the credit card company deserves it!). The idea is no one gets special treatment.

What that also means is that you have to include the outstanding debts owed to friends or family members in your bankruptcy as well. Those debts, too, will be formally discharged as part of the filing. If you want to go back 10 or 15 years down the road and repay it, that's up to you - but you should check with a bankruptcy attorney to make sure your actions will fall within the strict confines of the law.

The law regarding preferential payments essentially says that you presumed to be "insolvent," or unable to pay any debts, at least 90 days prior to your filing. So any payments that you make during that time, you could be responsible for returning to the account in order to distribute those payments equitably.

The bottom line is that you need to contact Los Angeles Bankruptcy Attorney Vincent Howard as soon as possible when you are first thinking about bankruptcy. Chances are if you are at that point, you are already up to your eyeballs in debt. Mistakes regarding preferential payments can cost you majorly. Consulting with your legal adviser early on in the process can help you avoid those headaches.

Los Angeles Bankruptcy Attorney Vincent Howard at Howard Law can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
Pay off credit cards before bankruptcy?, By Justin Harelik,

More Blog Entries:
Los Angeles Bankruptcy Should Not be Your Last Resort, July 22, 2012, Los Angeles Bankruptcy Lawyer Blog