The Chapter 13 Bankruptcy 90-Day Rule

One of the most common mistakes people make before filing bankruptcy is paying back a friend or family member who lent them money. It seems like the right thing to do. But under federal bankruptcy law, those payments can be clawed back by the trustee and redistributed to your other creditors. This is the preference rule, and understanding it is critical to a successful filing.

At our Pittsburgh office, we regularly counsel clients on the timing of their bankruptcy filing specifically because of this rule. Getting the timing wrong can create serious problems that are entirely avoidable with proper planning.

What Is the 90-Day Preference Period?

Section 547 of the Bankruptcy Code gives the trustee the power to recover certain payments you made to creditors within 90 days before your bankruptcy filing date. These are called "preferential transfers." The logic behind the rule is straightforward: bankruptcy law wants all unsecured creditors treated equally. If you paid one credit card company $5,000 right before filing but owe three other creditors similar amounts, that payment gave one creditor an unfair advantage.

The trustee can sue to recover that payment and put it back into the bankruptcy estate so it can be divided fairly among all creditors. This applies in both Chapter 13 and Chapter 7 cases, though the practical impact varies between the two.

The 1-Year Rule for Insiders

Here is where many clients run into trouble. For payments made to "insiders," the lookback period extends to one full year before filing. Insiders include family members, business partners, close friends, and any entity controlled by you or your relatives.

So if you repaid your brother $3,000 eleven months before filing, the trustee can still pursue that money. Your brother would then need to return those funds to the trustee. This puts your family member in a difficult position, and it is one of the primary reasons we advise clients to wait before filing after making any significant payments to people close to them.

What Counts as a Preference Payment

Not every payment made within 90 days is automatically a preference. Under 11 U.S.C. Section 547, the trustee must prove all of the following elements:

• The payment was made to or for the benefit of a creditor
• It was made for a debt you already owed (an antecedent debt)
• It was made while you were insolvent (bankruptcy law presumes insolvency for the 90 days before filing)
• It was made within 90 days of filing (or one year for insiders)
• The creditor received more than they would have gotten in a Chapter 7 liquidation

Regular monthly payments on current obligations, like your mortgage or car payment, generally do not qualify as preferences because they are made in the ordinary course of business. The trustee is looking for unusual or out-of-pattern payments.

Defenses to Preference Actions

If a payment is identified as a preference, the creditor who received it is not without options. Several defenses exist under Section 547(c):

Ordinary course of business: Payments made according to ordinary business terms on debts incurred in the ordinary course are protected. If you always paid your electric bill on time and continued doing so, those payments are safe.

Contemporaneous exchange: If you received something of equal value at the time of payment, it is not a preference. Paying cash for groceries the same day you bought them, for example, is not recoverable.

Subsequent new value: If the creditor extended new credit or value to you after the preferential payment, the amount of new value can offset the preference claim.

Small payment threshold: For consumer debtors, the trustee cannot pursue preference payments totaling less than $600 to any single creditor. This threshold prevents the trustee from spending estate resources chasing small amounts.

How This Affects Your Pre-Filing Strategy

When you come in for a consultation, one of the first things we review is your payment history over the past year. We are looking for any transfers that could trigger a preference action. Common situations we see with our Pittsburgh-area clients include:

• Repaying a parent or sibling who helped with rent or bills
• Paying off one credit card in full while ignoring others
• Making a large lump-sum payment to a doctor or hospital
• Transferring money or property to a spouse before separation
• Paying back a co-worker or friend who loaned you money

If we identify any of these situations, the solution is usually simple: wait. If you paid back a family member six months ago, we may recommend waiting until the one-year anniversary of that payment before filing. If you made a large payment to a creditor 60 days ago, waiting another month or two will put you past the 90-day window.

Practical Advice for Timing Your Filing

The preference rules are one of several timing considerations that affect your Chapter 13 repayment plan. Others include recent income changes, pending tax refunds, and upcoming property transfers. A good bankruptcy attorney will map out all of these factors and recommend the optimal filing date.

Here are some guidelines that apply to most situations:

• Do not pay back family or friends in the 12 months before you plan to file
• Do not pay off one creditor preferentially over others in the 90 days before filing
• Do not transfer property to anyone for less than fair market value
• If you have already made a problematic payment, tell your attorney immediately so the filing can be timed appropriately

The preference rules are not meant to punish you. They exist to ensure fairness among creditors. But they can catch people off guard if they do not understand the timing requirements. If you are considering bankruptcy, understanding these rules early gives you the best chance to plan your case properly and avoid unnecessary complications.