When you’re considering bankruptcy, paying back a creditor may seem like the responsible thing to do. But paying one creditor shortly before filing bankruptcy can sometimes create an unexpected issue known as a preferential transfer.

Understanding this rule before you file can help you avoid surprises.

What Is a Preferential Transfer?

Bankruptcy is designed, in part, to prevent certain creditors from receiving unfairly favorable treatment immediately before a case is filed. A preferential transfer can occur when you pay or transfer money to one creditor shortly before bankruptcy while other creditors remain unpaid.

Under federal bankruptcy law, a bankruptcy trustee may examine certain payments made during the 90 days before filing. Payments to relatives, business partners, or other qualifying “insiders” can be reviewed over a longer period, generally up to one year.

Not every payment made during these periods automatically becomes a problem. Specific legal requirements and exceptions apply.

What If You Paid Back a Family Member?

This is where people can run into trouble without realizing it.

Imagine you owe your mother $5,000 and repay her shortly before filing bankruptcy because you don’t want her to lose money. Even though your intentions may be good, the bankruptcy trustee could potentially consider that payment preferential.

In some circumstances, the trustee may seek to recover the money from the person who received it so those funds can be distributed according to bankruptcy law.

That means trying to protect a family member before filing could potentially put that person in an uncomfortable financial situation later.

Should You Stop Paying Everyone?

You shouldn’t necessarily stop all of your payments before filing bankruptcy. Ordinary payments such as mortgage payments, car payments, utilities, and other expenses can involve different considerations. There are also exceptions and monetary thresholds within the preferential-transfer rules.

The important point is that you should not make major financial moves simply because you think bankruptcy is coming without first understanding how those decisions could affect your case.

Tell Your Bankruptcy Attorney About Recent Payments

If you’ve already paid a creditor, friend, or family member, don’t panic and don’t hide the payment. Bankruptcy filings require financial disclosures, and your attorney needs accurate information to evaluate your situation properly.

Before paying off a creditor or transferring money, talk with an experienced bankruptcy attorney about how the transaction could affect your case. Reinherz Law serves clients throughout Philadelphia and South Jersey and can help you understand your options before you file.