Preference Payments And Why They Are Important

A “preference payment” is when a debtor treats one or more creditors greater than all of the other creditors. The general idea behind a bankruptcy is that all creditors receive equal treatment, whether in a chapter 7 or chapter 13. Preference payments do not include paying your day-to-day bills and living expenses. The bankruptcy code denotes paying a creditor $600 or more in a 3-month period; however, it is very common that some bills and minimum payments will total $600 or more, such as a mortgage, car payment, credit card minimums, etc. The trustee is looking for disclosure of those payments in your petition and schedules and will likely inquire if you paid above the minimum required payments; getting more than what the regular payment normally is. Disclosure of these payments is required and honesty with your attorney is imperative.

Throughout our process, we ask our clients if they have made payments to creditors totaling $600 or more in the last 90 days or if they have borrowed money from an “insider” (relative or business partner) and have paid back that debt in the last year. Beyond disclosure for the petition and schedules, why is this so important? Although the debtor may have simply been trying to pay back the debt above the minimum monthly payments to chip away at their debt, it can actually hurt their case in the eyes of the code and trustee. The bankruptcy code views preferential payments as destroying equal treatment that is afforded to all creditors of the debtor. Even if done without dishonest intent, preferring to make payments for one debt over other debts is unjust in the bankruptcy world.

There are a few situations to be aware of regarding preference payments. First, preference payments made to creditors may be recovered by the trustee from the creditor. The trustee will send notice to the creditor to return the money and if the creditor does not comply, the trustee may file a lawsuit on behalf of the bankruptcy estate to recover those funds. The debtor will not be penalized, but must cooperate with the trustee to assist. Second, the trustee may require you to reimburse the bankruptcy estate for the amount of preference payment made to an insider within the last year. Often trustees will accept a payment plan or a proposed settlement. We stress this question throughout our process because we do not want our clients to be put in a situation where they have to make an additional payment to the bankruptcy estate on a debt that has already been repaid, on top of the already stressful situation they are in.

There are some simple ways to avoid these situations. Consult with one of our attorneys to discuss waiting to file for bankruptcy until the one-year period has expired or wait until after you file your bankruptcy case, and then repay your relative or business partner with assets or income that are not attached to the bankruptcy estate.

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Trying to repay your debt is certainly not a crime! But consult one of the Kain & Scott attorneys by scheduling an appointment on www.kainscott.com for free advice and resolutions for your current financial distress.