A precept in bankruptcy is generally that unsecured creditors should be treated similarly in your bankruptcy case. For example, if you have ten credit cards and file for bankruptcy, each of the credit cards will get, if anything, the same amount — regardless of the amount that is owed on each specific card. Thus we run into problems when clients favor one creditor over another, and this is especially true when the favored creditor happens to be a relative or business partner, prior to the filing of a bankruptcy case.
The bankruptcy code provides that the trustee assigned to your bankruptcy case can undo any payment made to a creditor made within 90 days of filing your bankruptcy. If the creditor happens to be a family member or business partner, the trustee can look back up to one year before your filing and try and undo those payments. The process for undoing those transactions will be done through a lawsuit filed against the creditor who received the payment.
The purpose of this post is to provide guidance to potential filers, that if you are planning or even thinking of filing bankruptcy, it is best not to try and pay off any specific debt or worse to pay a family member over your other creditors. Such transfers/payments are likely preferences and could result in delay for your bankruptcy case and your creditor being forced to defend a law suit in the bankruptcy court.
JacksonWhite offers a free bankruptcy consulation where your specific financial situation can be discussed.