Avoid Preferential Payments

Why You Need to Beware of Preferential Payments

If you are in a scenario where you owe your friends and family a great deal of money, the ideal solution is to sell some assets and pay them back, right?

Well, maybe.

However, what happens if you owe your friends and family upwards of tens of thousands of dollars, but you are having trouble making your monthly credit card payments as well?

If the creditors have started calling to ask you for payments, and you’re trying to clear the air with your friends, it can be a difficult choice on who to pay back.

If you decide to sell your house, a boat, your vehicles, and other assets, only to pay back your friends and family, you could find yourself in a bit of conundrum if you cannot continue to make your payments on your other debt.

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When you are no longer able to make required payments on your debt but have paid back debt owed to your family and friends, this is known as preferential payments.

While ethically you may feel the appropriate thing to do is pay back your loved ones for money borrowed, your creditors may feel quite differently, especially if you need to file for bankruptcy.

When preferential payments cause problems

If you seek out one of our licensed insolvency trustees to start the bankruptcy process, only for you to acknowledge you recently paid off friends, the trustee must provide this information when filing for bankruptcy on your behalf.

At this point, your Trustee will reach out to those you have paid off to try and take back the monies that you had previously paid them since it is preferential payments.

This can prolong the bankruptcy process, be embarrassing since your trustee is now contacting your loved ones who helped you out during difficult times and put further financial strain on your family and friends.

A consumer proposal may be an option

If you are in this scenario, you may want to look into the option of filing a consumer proposal.

In the event that a consumer proposal is accepted by your creditors, you will not have to disclose that you previously paid off your friends and family with your assets.

A consumer proposal is not for everyone, but it can be a way to be able to get ahead of credit card payments and unsecured debt.

During a legally-binding consumer proposal the following things occur:


  • Your debt no longer accrues interest.
  • Creditors are required to stop contacting you.
  • You pay one bill each month to your trustee who allocates the funds to the creditors.
  • Depending on the terms of your proposal, your debt is reduced, or you are allowed to make smaller payments over a longer period of time.


If you’ve recently made preferential payments, you still have options to reduce your debt without requiring your trustee to contact your family and friends.

Contact Bankruptcy Canada to see how a credit counselor or licensed insolvency trustee can help.

Get your finances back on track today.

Canadian Bankruptcies

How to File for Bankruptcy
What is Bankruptcy?
Bankruptcy FAQs
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?

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