May 28, 2016
Preference in Chapter 7 Bankruptcy
When additional payments over and above the minimum of more than $600.00 are made to one unsecured creditor before another unsecured creditor it is considered a preference. In bankruptcy there are 2 types of preferences: an insider or an outsider. An insider preference would be a family member or business associate. An example of an outsider preference would be a credit card company.
The bankruptcy court treats the 2 types of unsecured creditor preferences differently. If the unsecured creditor is an insider creditor, then there is a 1 year look back for any payments made to that creditor. This means that the bankruptcy court can take back some or all of the payments made to that insider creditor. When this happens all unsecured creditors are allowed to get a portion of these monies by contacting the trustee. The bankruptcy trustee will then distribute the preference funds to all unsecured creditors that apply pro-rata . Outsider creditors have a 91 day look back period.
It is this look back period that allows the bankruptcy court to get back monies that were garnished from a debtor's paycheck and/or bank account. If a debtor has a garnishment, then filing for bankruptcy is a viable option for getting some or all of the money back. However, if a debtor recently paid off a loan to a parent or sibling, then he/she may want to wait before filing for bankruptcy.
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