When an individual falls behind on credit card, loan, or mortgage payments, he or she may still continue to make payments to a friend, or a family member for debts owed to them.

The court views this payment as a preferential payment, meaning that the debtor chose to pay one particular creditor, while not paying the remainder of his creditors. This can cause problems in bankruptcy, particularly a Chapter 7, if not correctly handled, chief among them being in a Chapter 7 the Trustee may go after the friend or family member to get the preferential funds returned so these funds can be equally divided amongst all creditors.

For this reason we counsel any clients who are considering filing a bankruptcy not to pay back any monies owed to family or friends until after we have fully analyzed the case. Additionally, no other creditor should get preferential treatment in terms of repayment without checking with the attorney first.

Sometimes, if such payments have already been made, debtors do not disclose this information because they fear potential consequences and believe, falsely, that preferential repayment will never come to light. However, bankruptcy Trustees are usually smart and resourceful. It is their job to track down information that may be well hidden. Bankruptcy fraud can be investigated by the FBI. And the penalties for deliberately withholding material information in bankruptcy are quite serious. So if preferential payments have already been made, it is extremely important to alert your attorney to that fact, to ensure that any actions that can be taken to protect the debtor and the individual who has been paid preferentially, are taken prior to filing the bankruptcy.