Preferential Payments & Bankruptcy
Updated: Sep 25, 2020
What is a preferential payment and why is it important to discuss before filing for bankruptcy?
A preferential payment means that you have "preferred" one creditor over another and chosen to pay one creditor a sum of money versus splitting the amount available to pay that one creditor over all of your creditors/debts. In bankruptcy, this can cause a problem because a preferential payment, defined as paying back one creditor an amount over $600 total within 90 days of your filing date, can be undone. This means that a Trustee can seek to reverse the transaction over $600 and reclaim that money to be evenly distributed between all creditors and not just the preferred creditor. This is super confusing! See the example below:
Example: Mary knows she will be filing for bankruptcy in March. In January, she decides to make a payment of $650 to her biggest credit card in the hopes that they will stop calling her while she works on getting her bankruptcy paperwork together. Once her case is filed in March, her Bankruptcy Trustee sues the credit card to get back the $650 so that they can equally split this money between all creditors in Mary's case.
This preferential payment issue can even be compounded by combining a preferential payment with an "insider". An insider is defined as a personal friend, relative or other party close to you. An insider is not subject to the 90 day rule, they are subject to a much longer "look back" period. This period can go back several years and it's important to discuss any potential insider preferential payments with an attorney so that you do not open up your insider to trouble from the Court. This often comes up when a party wants to pay back a relative for money they may have borrowed from that relative prior to filing for bankruptcy.
It IS possible to avoid preferential payment issues in a bankruptcy case! Always speak to an attorney if you are planning on filing for bankruptcy so that you can make sure you do some pre-filing bankruptcy planning. Make sure to read 5 things NOT to do before filing for Bankruptcy.
Attorney Allison Greenlee Korr handles cases in Kalamazoo, Battle Creek and all surrounding counties, call today for a consultation. 269-381-4471