Giving money or property away before filing Chapter 7 bankruptcy can hurt you. The bankruptcy trustee can pursue your friends, relatives and business partners to recover money and property that you transferred to them before filing bankruptcy. The trustee can seize transferred assets, which you would have been allowed to keep if you hadn't given them away.

Depending on your relationship with the recipient and whether the transfer was a gift or payment on debt, different reach back time limits apply. Preference law also applies to non-insider creditors paid within the 90 days prior to filing for bankruptcy.

Here are just a few hypothetical  examples of preferential transfers to avoid  if you are contemplating bankruptcy:

1.       You have a great doctor who you want to continue to use, but owe her $1000 from old bills.  You pay it back just before filing bankruptcy.  As you paid an unsecured creditor more than $600 in the 90 days prior to filing bankruptcy, the bankruptcy trustee will demand the $1000 from the doctor and evenly distribute it among all your creditors. If you had only paid the doctor $600 or less, the doctor could have kept the money.

2.       Your owed a close relation $4000 on an unsecured signature loan, which  you just paid back. You need to wait a year to file the bankruptcy.  If you file sooner, the bankruptcy trustee will go after your relative to recoup the $4000.  While you are waiting, a judgment creditor can garnish your paycheck.

3.       You own a residential house in New Mexico with $150,000 equity.  Because a credit card company is suing you  and may put a judgment lien on your house soon, you transferred title to your brother. The credit card company wins the suit and starts garnishing 25% of your paycheck. You need to wait 2 years before filing bankruptcy.  If you don’t wait, the bankruptcy trustee will take the house from your brother and auction it off to pay your creditors.  If you had not given the house to your brother, you would have been allowed to keep it in the bankruptcy. The bankruptcy filing would have also stopped garnishment of your paycheck.  A simple Motion to Avoid Judgment Lien in the bankruptcy case could have cleared your house title. 15