Preferential Debt Payments in Bankruptcy

A preferential debt payment is money you pay to one creditor—say, a family member, friend, or a pet’s medical insurer—ahead of others before filing for bankruptcy. The bankruptcy trustee appointed to your case can “avoid,” or undo, that payment, recover the funds, and redistribute the money to your other creditors. Here's what counts as a preferential payment, what happens once a trustee catches one, how a creditor can defend it, and what to do if you've already made one.

If you’re planning on filing for bankruptcy, consider learning about the differences between Chapter 7 and 13 and how to avoid potential bankruptcy problems by planning for bankruptcy.

The Debt Payment Preference Rules

A payment counts as preferential when you pay one creditor more than they'd otherwise receive in your bankruptcy case, at the expense of your other creditors. The Bankruptcy Code lets a trustee reclaim that money under two separate lookback windows, depending on who received it. You'll disclose these payments on the bankruptcy form called Your Statement of Financial Affairs for Individuals Filing for Bankruptcy, so the trustee can compare what you paid against what's fair. (11 U.S.C. § 547.) 

Payments Within 90 Days of Bankruptcy

The 90-day rule catches ordinary preferential payments made to any creditor. If your debts are primarily consumer debts—not debts related to running a business—the trustee can reclaim money paid to a creditor as a preferential payment if the following are present:

• the payments were made to one creditor
• totaling over $600 in the 90 days before filing
• while the debtor was insolvent (debts exceeded assets), and
• the total exceeded the amount the creditor would otherwise have received in bankruptcy.

The maximum payment amount increases to $8,575 if you owe mostly business debts (valid April 1, 2025 through March 31, 2028). And you don't have to take the trustee's word for it on insolvency. The Bankruptcy Code presumes you were insolvent during those 90 days, so the burden falls on you or the creditor to prove otherwise.

Payments to Insiders Within One Year of Bankruptcy

The one-year rule targets payments to “insiders”—creditors debtors commonly favor, like family, friends, and business partners—and gives the trustee a much longer reach-back window than the standard 90 days. The Bankruptcy Code defines an insider to include a relative of the debtor, a general partner of the debtor, a partnership in which the debtor is a general partner, and a corporation where the debtor acts as a director, officer, or person in control. (11 U.S.C. § 101(31).)

Courts have also treated close friends and business associates as “non-statutory insiders” when the relationship gives the debtor a reason to favor them over other creditors, though friendship alone isn't enough to earn that label.

The Trustee and the “Clawback” Procedure

The trustee will typically ask the creditor to return the money voluntarily and, if that fails, take the dispute to the bankruptcy judge to decide as a central or “core” proceeding in bankruptcy. If the judge determines the debtor made a preferential debt payment before filing the case, the trustee can avoid the payment and get the money back for the benefit of creditors. In a Chapter 13 case, the trustee typically has up to two years after the case is filed to bring a preference lawsuit, so a preferential payment can surface well after your case begins.

Preferential payments aren’t illegal unless you made them to defraud your creditors or hide money from the trustee. Still, the payment recipient will have to return the money either way. Sometimes the debtor repays the funds instead, just to spare the creditor from litigation, especially when friends or family are involved.

Defenses to a Preferential Payment Claim

Not every pre-bankruptcy payment that fits the preference rules gets clawed back. The Bankruptcy Code gives creditors several defenses to a preference claim. The most common is the ordinary course of business defense, which protects a payment made to satisfy a routine debt if the payment followed the debtor and creditor's usual practice or matched typical industry terms.

Another defense covers a substantially contemporaneous exchange, such as paying cash for a purchase at the time of sale, since the creditor didn’t gain an advantage over other creditors for an old debt. A trustee generally can't pursue a preference claim against a consumer creditor when total payments to that creditor fall below the $600 threshold. (11 U.S.C. § 547(c)(8).) 

Why Bankruptcy Treats Creditors This Way

Bankruptcy's preference rules keep the process fair and account for the tendency to pick and choose whom to pay when money is tight. Left unchecked, creditors would receive less than they'd otherwise be entitled to.

Debts also don’t all receive the same treatment in bankruptcy. Priority payment rules require that debts considered important to repay, such as support obligations and recent taxes, be paid before lower-priority debts like credit card balances, medical bills, and personal loans.

Avoid Preferential Payments, and Know What Comes Next

Your best strategy is to avoid violating the preferential payment rules altogether. Some people believe delaying their filing is the answer, but it might not work out quite how you expect. Whenever you intentionally hide assets or defraud your creditors, you risk losing the benefit of your bankruptcy discharge and facing criminal prosecution.

Next, learn about other red flags trustees will look for in bankruptcy paperwork.