If you receive a letter from a bankruptcy trustee demanding money back because of a payment you made before filing, it can feel shocking.
“I was just paying my bills. How can that be wrong?”
This is called a preference action, and it’s one of the most misunderstood parts of bankruptcy law.
Let’s break it down.
📌 What Is a Preference?
A “preference” is a payment made to a creditor shortly before filing bankruptcy that gives that creditor more than they would have received in the bankruptcy case.
Bankruptcy law is built on the principle of equal treatment of similarly situated creditors.
If you paid one creditor in full right before filing — while others get little or nothing — that’s considered “preferential.”
It doesn’t mean you did anything dishonest.
It means the law tries to level the playing field.
⏳ The Lookback Period
The trustee reviews payments made within:
- 90 days before filing (for regular creditors), and
- 1 year before filing (for insiders like family members, business partners, or close associates).
This is automatic review territory.
💰 How Much Triggers a Preference?
In consumer cases, trustees typically pursue preferences when:
- Payments total more than $600 to a single creditor within 90 days before filing.
In business cases, the threshold is higher (currently over $7,000, adjusted periodically).
It’s not about one $50 payment — it’s about aggregate payments.
🏦 Common Preference Scenarios
1️⃣ Paying Back Family
You repay your parents $5,000 before filing.
Even if it was a legitimate loan, that can be recovered.
Why? Because family members are “insiders,” and the lookback period is longer.
2️⃣ Settling a Lawsuit
You settle a collection lawsuit and pay $3,000 within 90 days of filing.
The trustee may demand that money back from the creditor.
3️⃣ Catching Up One Credit Card
You pay off one card to preserve the relationship while other cards go unpaid.
That may qualify as preferential.
4️⃣ Wage Garnishments
Even garnished wages can sometimes be considered preferences if they fall within the 90-day window.
⚖️ Who Has to Pay It Back?
Important:
The trustee usually seeks repayment from the creditor who received the money, not from you.
However:
- If you repaid a family member, the trustee may sue them.
- That can create awkward or stressful situations.
In some cases, debtors choose to help family resolve the claim — but legally, the action is typically against the recipient.
🛡 Are There Defenses?
Yes. Not all payments are recoverable.
Common defenses include:
✔ Ordinary Course of Business
If the payment was made in the normal pattern and timing of your usual payments, it may not be recoverable.
Example: You regularly paid your credit card monthly and continued doing so.
✔ Contemporaneous Exchange for New Value
If you paid and received new goods or services at the same time, it may not be a preference.
Example: Paying cash for inventory at the time of purchase.
✔ Subsequent New Value
If the creditor provided new goods or services after receiving payment, that may offset the amount recoverable.
🚩 Why Trustees Pursue Preferences
Trustees have a duty to:
- Maximize recovery for the bankruptcy estate
- Distribute funds fairly among creditors
If they recover $5,000 from one creditor, that money is redistributed according to bankruptcy priority rules.
It’s not punishment. It’s redistribution.
😟 Does This Affect My Discharge?
Usually, no.
Preference actions typically:
- Do not affect your discharge
- Do not accuse you of wrongdoing
- Do not prevent your bankruptcy from moving forward
They are primarily about recovering funds from third parties.
💡 Strategic Planning Matters
This is why timing before filing bankruptcy is important.
Before filing, it’s wise to discuss with an attorney:
- Recent large payments
- Repayments to family
- Lawsuit settlements
- Garnishments
- Business transfers
Sometimes waiting a few weeks or months can avoid preference exposure.
Sometimes disclosure and planning can reduce risk.
📌 The Bottom Line
A preference action:
- Is not an accusation of fraud
- Is not criminal
- Is about equal treatment of creditors
- Often targets the recipient, not you
If you’ve received notice of a preference issue, don’t panic — but do speak with your bankruptcy attorney promptly.
Bankruptcy law is designed to balance fairness. Preference actions are simply one of the tools used to achieve that.
