Most consumers are not thinking about making fraudulent transfers or preference payments and these terms are really technical in nature but can have a devastating effect on the filing of any bankruptcy petition.

For example, let’s say that your mother, father, brother, sister, aunt, grandmother or friend gave you a personal loan of $3,000 to see you over a bad time. You receive your tax refund and pay them back and then file a Chapter 7 petition.

The Bankruptcy Court allows the Trustee to treat this payment as a ‘preference’ or ‘fraudulent transfer’ (The Trustee is the one who examines your petition and yourself).

Upon discovering this information which you must reveal prior to filing your petition in your Statement of Financial Affairs (SOFA) (which is part of your bankruptcy petition), the Trustee will most likely send a letter to that person to pay over to the Trustee that money.

If the person doesn’t send the money, then the Trustee will file a Motion for Turnover of the Funds with the Court and under these facts, the motion will be granted. Meanwhile, you and your family are very upset with your attempt to obtain a ‘fresh start’.

Why would this payment to a family member be considered a preference? Because under the Bankruptcy Code all creditors have to be treated equally and you cannot prefer one creditor over the other.