Avoid Being Nice to “Special” Creditors Before Filing Bankruptcy

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Avoid Being Nice to “Special” Creditors Before Filing Bankruptcy

One of the best ways to hurt one of your creditors is by being nice to him, her, or it. Specifically, if, before you file a bankruptcy, you pay a creditor much more than you are paying at that time to your other creditors, then that favored creditor may be required to give back that money so that it is shared among all the creditors. Your payment to your favored creditor is called a “preference”—you are considered to be paying that creditor in “preference” to your other creditors.

The practical problem is that your good intentions backfire. Your desire to be nice to that special creditor—often a family member or some other kind of sensitive creditor–by paying off that debt and keeping it out of your bankruptcy case results in the opposite. Your favored creditor gets mixed up in the bankruptcy case you may well have been trying to avoid having him or her even know about. He or she has to give up the money you paid—and may have to come up with it somehow after having spent what you paid him or her. And assuming that you feel a moral or family obligation to make him or her whole, you’ll be paying that debts a second time after your bankruptcy is done.

The good news about this problem is that it can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the “preferential” payment or series of payments to that favored creditor. Or even if you’ve already made that payment or series of payments when you see your attorney for the first time, there are often ways to get around it.

But I caution you that the law about preferences is complicated. Section 547 of the Bankruptcy Code, while by no means the most confusing one in the Code, is still plenty unclear. It’s about 1,318 words long, containing 56 sub-sections and sub-sub-sections. If you look at it, I think you’ll agree that this is NOT a do-it-yourself aspect of bankruptcy law.

So if there is a chance that you will be needing to file a bankruptcy, before you pay anything to a relative or any other kind of special creditor that you feel duty-bound to pay, first talk to an experienced bankruptcy attorney. Do so even if—in fact especially if–you don’t consider him or her to be a “real” creditor, because the debt was never put in writing, or nobody knows about it. And most importantly, if you have made such a payment before you see your attorney, absolutely be sure that you disclose that, and do so right away. It may well affect the timing of your bankruptcy filing. Preferences are mostly a problem when they are discovered AFTER the bankruptcy is filed. That’s what you most want to avoid. Avoid that and most likely preferences will not be a problem for you.