Preference in a bankruptcy means that you are showing favoritism to one creditor over the others. In other words, you treat one creditor better than another. For an example, let’s say that you received a bonus check of $1000 on top of your regular pay. You have a large number of creditors and you owe them all a considerable amount of money. However, you do have a charge card to your favorite department store and you choose to take your bonus check to pay off the $1000 balance on that account since you really like that card and want to be able to continue using it. Well, the court has a bit of a problem with that!
The court views this as “preferential treatment” and views it as you should have evenly spread out that $1000 by paying a little bit to each creditor instead of giving the entire $1000 to one specific creditor. Upon your bankruptcy filing, the bankruptcy Trustee will then contact that creditor (in this example is your favorite department store) and make them return the money to him so that he can divide it out equally among ALL of your creditors.
When you meet with your attorney prior to your bankruptcy filing, you need to discuss which creditors/debts you have been paying and the amounts that you have paid. You will also want to have an idea or timeframe as to when you will be filing your bankruptcy, so your attorney can advise you whether or not to pay any creditors and how much you should pay if you choose to pay them.
A normal credit card or medical bill can be deemed as preferential treatment but do not confuse this with your secured debts such as a home loan or car loan. If you are filing a Chapter 7 and plan on keeping your house and/or car, these loans MUST be current at the time you file your bankruptcy and kept current during your time in bankruptcy in order for you to keep them without any problems arising. Making payments to secured creditors above everyone else is not viewed as a preference.
Another important thing to keep in mind is that preferential payments to “insiders” – family members or friends – are also viewed as problematic. There can be consequences to paying family members or friends prior to your bankruptcy filing, so if you have done so or are considering do so and are also considering bankruptcy, you should talk to a bankruptcy attorney immediately. Depending on the circumstances, the bankruptcy Trustee may require the friend or family member you paid the money to to return that money to the Trustee so he can distribute it to your creditors. Therefore, it is very important to discuss this situation with your attorney prior to your bankruptcy filing.
If you are considering paying a debt prior to your bankruptcy filing, contact your bankruptcy attorney first to ensure that you are not going to cause problems later on in your case.