The decision to declare bankruptcy is not an easy one to make. Once you have chosen to commit to the process, it is normal to have a lot of questions about this unfamiliar undertaking.

You may already understand the difference between Chapter 7 and Chapter 13 bankruptcy, but something you may not have encountered before is preference law. If you are about to move forward with a Chapter 7 bankruptcy case, this policy may impact recent debt payments.

What is preference law?

Preference law refers to a period before you file for bankruptcy. During this time, if you make a payment on a debt, or the collector garnishes wages from your paycheck, that money may need to come back. By allocating precious funds from your existing assets, you give preference to one creditor over another.

The Chapter 7 bankruptcy process may involve liquidation of non-exempt assets. The money from this step can then go toward paying down some of your debt. Any payments you make 90 days prior to officially filing may be eligible for inclusion in this stage.

Why does it exist?

Creditors and debt collectors lose out when you declare bankruptcy. To remain fair to all those involved, the government put preference law into place to keep distribution of repayment even across the board. The idea is that each collector deserves repayment as much as the rest of them.

In some cases, preference law can work in your favor. Wage garnishment is often beyond your control. You will receive several paychecks within 90 days before filing, which adds up to a substantial amount of money. You can then distribute these funds across all your debts to minimize how much of the remaining balances become discharged.

You will likely have many questions about the process if you decide to file for bankruptcy. Keep this surprising law in mind as you prepare for the next steps.

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