Can you give preference to certain creditors in a bankruptcy?
If your company is struggling to stay afloat, you may start to think about filing for bankruptcy. When you look at the people you owe money to, you might feel more loyalty toward some than others. Yet, this does not mean you can play favorites when choosing who to pay.
Section 547 of the Bankruptcy Code aims to prevent people in bankruptcy or about to go into bankruptcy, picking who they pay. It seeks to ensure that all creditors are treated the same during bankruptcy proceedings. While the court can give some creditors preference, you cannot.
Let’s say you own a restaurant and will have to shut up shop due to a disastrous last year. You have good reason to want to pay some people before others. For example, you know that Bob, your fresh fish supplier needs the $3,000 you owe him much more than the large kitchen outfitter needs the $20,000 you owe them for the new kitchen they supplied. What’s worse, Bob is married to your sister, whereas the kitchen outfitters are an out-of-state company you have no personal relationship with.
What is a bankruptcy preference claim?
If you pay Bob his $3,000, he might not get to keep it. The trustees appointed to handle your bankruptcy may issue a bankruptcy preference claim to reclaim it. They can do so if specific circumstances apply. These include:
- You made the payment within 90 days of filing, or 12 months if you paid to an insider
- You paid Bob more than he would have received if you had dealt with all creditors equally
Understanding what you can and cannot do in bankruptcy is complex. Getting it wrong could create further complications for you and those you work with.