Is Payment of Past Due Secured Debt A Bankruptcy Preference?

A debtor owes money to his parents, and his parents long ago recorded a mortgage on the debtor’s real property. The debtor was behind in the note payments to the parents. The debtor is concerned about that paying his loan to his parents would be an improper preferential payment in a Chapter 7 bankruptcy proceeding.

The concept of impermissible bankruptcy preferences is supposed to ensure the equal treatment of all creditors within a particular class. Bankruptcy law is designed not only to help the debtor get a “fresh start” but also to make sure all creditors are treated equally. Chapter 7 bankruptcy discharges all unsecured debts. It would be unfair for a debtor to pay an unsecured debt to his parents or other family members and pay nothing to other unsecured creditors. A trustee may seek to reverse and recapture preferential payments to insiders within one year of a Chapter 7 bankruptcy filing.

This client’s debts to his parents were fully secured. Payment of his secured debts would not be unfair to the other unsecured creditors. If the debtor paid money to his parents that was not yet due under the note, the trustee could attack those payments as fraudulent transfers. Paying past due payments to a secured creditor is not a preference as to unsecured creditors.

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