If you repay a family member or close friend within one year before filing bankruptcy in Corona CA, the bankruptcy trustee may be able to recover that money from them. These payments are called preferential transfers, or preferences. The Bankruptcy Code treats all similar creditors equally, so paying back a relative ahead of your other creditors can be undone, and your loved one could be asked to return what you paid. The good news is that with careful planning before you file, you can often avoid putting family members in that position. Winterbotham Parham Teeple, a PC helps Corona residents review their recent payments and plan the timing of their case.

What Is a Preferential Transfer?

A preferential transfer is a payment or transfer of property made to a creditor shortly before filing bankruptcy that gives that creditor more than they would have received in your bankruptcy case. Under Section 547 of the Bankruptcy Code, a trustee can generally recover a payment if it was:

• Made to a creditor for a debt you already owed
• Made while you were insolvent, meaning your debts exceeded your assets
• Made within the look-back period before your filing date
• Large enough to give that creditor a better result than other creditors

The idea is simple: no single creditor should be able to cut to the front of the line just before a bankruptcy is filed.

Why Are Payments to Family Treated Differently?

The look-back period depends on who you paid. For ordinary creditors, such as a credit card company or a medical provider, the trustee generally looks back 90 days. For insiders, the look-back period extends to one full year.

Insiders include relatives such as parents, children, siblings, and spouses, as well as business partners and companies you control. Lawmakers extended the period for insiders because people naturally want to protect those closest to them when they sense financial trouble coming.

For consumer debtors, payments to a single creditor that total less than $600 during the look-back period generally cannot be recovered as preferences.

What Happens If the Trustee Finds a Preferential Payment?

If the trustee determines you made a preferential payment, the trustee can demand the money back from the person who received it, not from you. In some cases, the trustee may file a lawsuit against that family member or friend. Any money recovered is then distributed among all of your creditors.

This can create strain in family relationships, especially if your relative has already spent the money. Many people in Corona are surprised to learn that repaying a parent who helped them through a hard time could lead to the trustee contacting that parent.

How Do Preferences Affect a Chapter 13 Case?

In Chapter 13, the trustee usually does not sue to recover preferences in the same way. However, your repayment plan generally must pay unsecured creditors at least as much as they would receive in a Chapter 7 case. That calculation can include the value of any preferential payments the trustee could have recovered, which may raise your plan payments. Learn more about how repayment plans work on our Chapter 13 bankruptcy page.

Is a Preference the Same as a Fraudulent Transfer?

No. A preference involves repaying a real debt. A fraudulent transfer involves giving property away, selling it for far less than it is worth, or moving assets to hide them from creditors. Fraudulent transfers carry a longer look-back period and more serious consequences. Both should be discussed openly with your attorney before you file.

How Can I Avoid Problems With Preferential Transfers?

The best protection is planning ahead. Before filing, consider these steps:

1. Stop making payments on loans from family members once you are considering bankruptcy
2. Gather records of all payments to relatives and friends within the past year
3. Disclose every payment honestly on your bankruptcy paperwork
4. Ask your attorney whether delaying your filing date could move a payment outside the look-back period

Never hide or leave out a payment. Incomplete disclosures can put your entire discharge at risk.

Frequently Asked Questions

Can I pay my family back after my bankruptcy case is over?

Yes. Once your case is complete, you are free to voluntarily repay anyone you choose.

Are regular monthly payments to a relative still preferences?

They can be. Ongoing payments on a family loan may still be recoverable, depending on the circumstances.

Does the rule apply to gifts to family members?

Gifts are not preferences, but they may be reviewed as fraudulent transfers.

Talk to a Corona Bankruptcy Attorney Before You File

Reviewing your recent payments before filing can protect both your fresh start and the people you care about. For over 30 years, Winterbotham Parham Teeple, a PC has guided Southern California families through every step of the bankruptcy process. Visit our Corona bankruptcy office for a free consultation, or call 800.400.9000 today to schedule your appointment.