FAQ's - Preference in Paying Creditors

Preference in Paying Creditors

My daughter will be filing bankruptcy. She is living with me and paying me rent. Will the rent which she pays to me be a preference which the trustee may recover?

A preference in the bankruptcy code refers to the repayment of existing debt to one creditor while filing bankruptcy on other debts. If a person pays a total of $600 or more to any one creditor within the preference period, the trustee may require that the creditor turn over the money so that it may be shared by all creditors. This preference period is 90 days for most creditors, but is extended to one year for "insiders", which includes relatives such as your daughter. � 547(b).

Your daughter can pay rent to you (or anyone else) without it being a preference, if it is contemporaneous payment for services. However, if she owed you back rent which she had not paid, it is possible that payment of this old rent might be considered a preference.

Preference applies only to payments which are made before the bankruptcy is filed. After she has filed bankruptcy, she can pay you or any other creditor and it will not be a preference. [1-99]

Payments to five of my nine creditors exceeded $600 over the past 90 days. However, all payments were at or slightly above the minimum payments required to keep the accounts current, and all were roughly proportional to the total balances owed. Will these payments jeopardize Chapter 7 filing?

The short answer is no, your bankruptcy would not be in jeopardy.

A preference is usually a problem for your creditors, and not for you. If you have made payments to creditors which qualify as preferences, the Trustee may seek to recover your preferential payments from the creditor. Your debt to that creditor would still be discharged.

There would be a problem if for some reason you wanted the creditor to be able to keep the preferential payments, such as when the creditor is a relative, or when you have made payments on accounts on which a relative might be liable. If you made preferential payments to a relative, you can expect the Trustee to recover those payments from the relative. If you made preferential payments to a creditor on an account on which the relative might be a cosigner, the creditor will still expect your relative to pay the account after it returns the preference to the Trustee. [9-19-04]

These questions and answers are not intended as legal advice or as a statement of the law. They are intended to suggest areas which you should discuss with your attorney.

Although Bankruptcy law is Federal code applicable to all states, the way it is applied may depend upon state law and varying practices of the courts, trustees, and even attorneys. As a result, some of these answers are directly applicable only in cases filed by our office in Arizona.