If you have filed a bankruptcy, or are considering filing a bankruptcy, and have done any research, you may have come across the phrase “preference payment” and asked yourself, “what does that mean?” Well, rest assured, you are not alone in asking this question. This post will discuss preference payments and what they mean with respect to a bankruptcy filing.
When a bankruptcy is filed, there are several financial disclosures that must be made as part of the documents that are filed with the court in a section called the Statement of Financial Affairs. One set of disclosures is about payments made to creditors in the time leading up to the bankruptcy filing. The payments referenced in this disclosure are called “preference payments.” There are two types of preference payments—payments to ordinary creditors and payments to insiders (relatives)—each having its own disclosure section.
For ordinary creditors, the disclosure is whether the individual has made payments totaling $600 or more to any one creditor in the ninety days prior to filing. For a payment to an insider, the disclosure period is one year, and there is no minimum amount. This means that upon filing a bankruptcy, an individual must disclose any payments that fit into either of the aforementioned descriptions.
Why Is a Disclosure Requirement Necessary?
You might find yourself asking, “what is the reason for the disclosure requirement?” Bankruptcy filings are enveloped by the concept of equity, and as such, the reason for this disclosure is that the Bankruptcy Code is designed to guard against treating creditors disparately, and also to discourage bad behavior amongst the creditors. For example, if Discover is absolutely hounding you to make payments, but Capital One is being respectful of your wishes to stop demanding payment, and you pay Discover to get it off your back, the Bankruptcy Code says, “hey that’s not fair” by creating this concept of preference, and allowing the funds to be recovered from Discover and then paid to all of the creditors equally.
The unfortunate consequence of this code section, and the only application that really negatively affects bankruptcy debtors, is that individuals trying to do the “right thing” by paying back loans to relatives prior to filing actually creates a claim for the bankruptcy estate wherein it can pursue their relatives for the money that they have repaid. This is a common issue and one that we have several years of experience in dealing with at Kain & Scott.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT KAIN & SCOTT
If you are currently contemplating a bankruptcy filing and are thinking about paying back creditors prior to filing, or have already made the payments, please do not hesitate to reach out to Minnesota’s nicest bankruptcy law firm at www.kainscott.com for advice regarding how those payments could affect your bankruptcy, or how to navigate dealing with them after a bankruptcy filing. We look forward to hearing from you and helping you get rid of your debt and get your life back.