Preference in Bankruptcy and the $600 Threshold

Introduction

When filing bankruptcy, the court wants to make sure no creditor is treated better than others right before you file. This is where the concept of a “preferential transfer” comes in. If you paid more than $600 to a creditor in the 90 days before filing, the trustee may have the power to recover (or “claw back”) that payment.

What Is a Preferential Transfer?

A preference occurs when:

1. You paid a creditor within 90 days of filing bankruptcy (or 1 year for insiders like family/friends).

2. The total payments to that creditor exceed $600.

3. The payment gave that creditor more than they would have received through bankruptcy.

   
   

The $600 Rule Explained

• Consumer Debts: If you pay more than $600 in total to a single creditor within 90 days, the trustee may review it.

• Insider Debts: Payments to relatives, friends, or business partners are reviewed for 1 year back, regardless of amount.

• Small Payments: Less than $600 total in consumer cases typically won’t trigger trustee action.

Examples of Preferences

• Paying $1,000 to a credit card in a lump sum 2 months before filing.

• Repaying your sibling $2,000 for a loan last year.

• Catching up on three months’ rent in a single payment right before filing.

Why Preferences Matter

• Fairness to All Creditors: The trustee’s role is to make sure no creditor is “preferred.”

• Clawback Authority: The trustee may demand the money back from the creditor (not from you).

• Impact on Relationships: If you repaid a family member, they may have to return the funds.

Common Misconceptions

• “It’s my money, I should choose who to pay.” Once you file, fairness to all creditors outweighs favoritism.

• “I only paid family, not a bank.” Insider payments are scrutinized more closely. “They won’t find out.” Trustees review bank statements and financial records carefully.

Practical Tips

1. Don’t make large debt payments right before filing.

2. Tell your attorney if you have paid back family or friends.

3. Be transparent — hiding transfers risks denial of discharge.

4. Focus on essentials (food, utilities, necessary living expenses) instead of paying off old debts before filing.

What Happens If a Preference Is Found?

• The trustee can demand repayment from the creditor or family member.

• You usually don’t owe twice — the creditor returns the money to the trustee, not you.

• In rare cases, failing to disclose can jeopardize your bankruptcy discharge.

Conclusion

Preferences and the $600 threshold are about protecting fairness in bankruptcy. If you’ve made payments to creditors or family members before filing, disclosure is critical. With full honesty and preparation, your case can move smoothly and you’ll avoid surprises down the road.

💡 Next Step: Gather your last year of bank and payment records — your attorney will help determine if any payments may be considered preferences.