Why Timing Your Payments Matters in Bankruptcy

If you’re thinking about filing for bankruptcy in Massachusetts, it might seem responsible, or even morally right, to repay certain debts first, especially to friends, family members, or trusted businesses. However, doing so can sometimes create legal complications. 

Bankruptcy law includes a rule called a preference action, which allows a trustee to recover certain payments made shortly before a bankruptcy filing.

 

Understanding how preference rules work can help you avoid unexpected lawsuits and protect both yourself and the people you’ve repaid.

 

What Is a Preference Action?

 

A preference action allows a bankruptcy trustee to recover payments made to certain creditors before a bankruptcy filing. The purpose is to prevent one creditor from receiving more than others through the bankruptcy process.

 

For example, if you repay a personal loan from a relative shortly before filing, the trustee may view that payment as unfair to your other creditors. The trustee could then seek to recover the funds and redistribute them among creditors according to bankruptcy law.

 

These rules apply in both Chapter 7 and Chapter 13 cases, including those filed in the U.S. Bankruptcy Court for the District of Massachusetts.

 

What Counts as a Preference?

 

Under federal bankruptcy law, a payment may qualify as a preference if several conditions are met. Trustees typically evaluate whether the transfer:

• Was made to a creditor
• Paid an existing (antecedent) debt
• Occurred while the debtor was insolvent
• Happened within a specific time period before filing
  Allowed the creditor to receive more than they would through bankruptcy

The Bankruptcy Code presumes a debtor was insolvent during the 90 days before filing, though insolvency can also be proven outside that window.

 

The key timing rules are:

• 90 days before filing for most creditors
• One year before filing for “insiders,” such as relatives or close business partners

In consumer cases, trustees typically focus on payments totaling $600 or more to a single creditor within the 90 days before filing. Multiple smaller payments can add up to reach this threshold.

 

Why Pre-Filing Payments Can Backfire

 

Trying to repay certain debts before bankruptcy can sometimes create unintended consequences.

 

For example:

• Credit cards: Paying $700 to one card while ignoring others could trigger a preference claim.
• Friends or family: Repaying a personal loan within a year of filing may allow the trustee to seek recovery from that person.
• Relationship strain: A trustee demanding repayment from a loved one can create uncomfortable situations.

For these reasons, many attorneys recommend avoiding large lump-sum payments to unsecured creditors when you are seriously considering bankruptcy. Before changing your payment habits, however, it’s important to speak with a bankruptcy attorney about your specific circumstances.

 

Are Any Pre-Filing Payments Safe?

 

Bankruptcy law provides several defenses creditors can raise if a trustee brings a preference claim. These include:

 

Ordinary course of business: Routine payments made consistently over time, such as regular rent or utility bills.

 

Contemporaneous exchange for new value: Payments where you receive something of equal value at the same time, such as paying cash for goods.

 

Subsequent new value: Situations where a creditor provides additional goods or services after receiving payment.

 

These defenses are fact-specific, and what feels ordinary to a debtor may not appear that way to a trustee reviewing the case.

 

Why Preference Rules Exist

 

Preference laws are designed to promote fairness among creditors. Bankruptcy aims to distribute available funds according to established priorities. Without these rules, debtors could repay favored creditors before filing, leaving others with little or nothing.

 

The law also discourages aggressive collection efforts and helps keep the bankruptcy process more orderly for everyone involved.

 

Guidance for Massachusetts Filers

 

If you are considering bankruptcy in Massachusetts:

• Avoid repaying friends or relatives shortly before filing
• Be cautious about making large payments to one creditor while ignoring others
• Fully disclose recent payments in your bankruptcy paperwork

Trustees carefully review financial records and financial disclosures for potentially avoidable transfers.

 

How Ravosa Law Helps Clients Prepare

 

Ravosa Law represents individuals and small businesses throughout Massachusetts in bankruptcy matters. Our attorneys help clients understand how timing, payments, and financial decisions may affect their case.

 

We assist clients with:

• Reviewing recent payments and financial activity
• Identifying potential preference risks
• Preparing accurate bankruptcy disclosures

If you’re considering bankruptcy, speaking with an attorney early can help you avoid costly mistakes and approach the process with greater confidence. We offer free consultations to help Massachusetts residents understand their options and move forward with clarity.