Repaying Creditors Prior to Bankruptcy


It is commonly believed that consumers tend to show long-term loyalty to the first company that offers them a credit card. It may be for this reason that college campuses have become prime grounds for credit card companies to entice students into debt. In circumstances where the default is being contemplated, loyalty to one creditor over the other may translate to the consumer electing to pay one debt or creditor while seeking to discharge the others. In the case of bankruptcy, this preferential treatment can be problematic for the bankruptcy filer.

The Bankruptcy Code, which is the body of federal law that governs bankruptcy, is replete with considerations of fairness and equity in how similarly situated creditors[1] are treated. The idea is that no creditor should be treated better than other creditors with similar interests. This means that a bankruptcy filer cannot choose to repay one credit card or personal loan to a family member, while opting to discharge all other general unsecured debts through bankruptcy.

Bankruptcy filers are required to disclose any payments that they have made to insiders[2] within one (1) year prior to filing and non-insiders within three (3) prior to filing. These preferences may be subject to recovery by the bankruptcy trustee. In the case of a Chapter 7 bankruptcy, the trustee may seek to recover the payments from the filer or directly from the creditor and in the case of a Chapter 13 bankruptcy, the trustee may ask for the preference payment to be paid as part of the overall Chapter 13 plan balance. Once recovered, the trustee in turn may elect to distribute these payments among all similar creditors on a pro rata basis.

The bottom line for bankruptcy filers is to treat all similarly interested creditors alike i.e. treat all credit cards the same etc. as there is no special benefit to the filer. In fact, a bankruptcy filer choosing to pay one creditor over the others may have the opposite effect.

If you are considering filing bankruptcy, it is important to get the help of an experienced bankruptcy firm as soon as possible. Contact our Fort Lauderdale bankruptcy attorneys for more information on how we can help you.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 1,800 homes from foreclosure, eliminated $100,000,000 in mortgage principal and consumer debt, and have collected millions of dollars on behalf of our clients due to bank, loan servicer, and debt collector violations, negligence and fraud. Contact us for a free consultation to see how we may be able to help you. Call us at 1-888-Fight13 (344-4813).

[1] Common classification of interests include, administrative, general unsecured, priority unsecured, and secured claims.

[2] §101 (31)(A) defines the following to be an insider in cases where the debtor is an individual: relative, business partner or director, officer or person in control of the debtor.