What about payments made before filing Bankruptcy?

What about payments made before filing Bankruptcy?

A common question that is asked is what happens to payments made before filing Bankruptcy?

Well, there are two types of creditors in most bankruptcy cases: ordinary creditors and insider creditors.

Ordinary creditors are creditors like Wells Fargo, American Express, Discover, Target, etc…

Insider creditors are creditors who are related to you, do business with you, know your financial affairs, etc…

It is not unusual for clients to come into my office with a stack bills that show minimum payments of several hundred dollars due each month (especially since most credit card companies have jacked interest rates up to 25-29%).  It is also not unusual for a client to reveal that he or she, ‘paid mom back for the loan she gave’ right before the client called me (this is bad–don’t do it!).

Clients wince when I explain that we must disclose payments made to those ordinary creditors that amount to more than $600 in the 90 days prior to filing. We must disclose payments made to insider creditors that amount to more than $600 in the 1 year prior to filing.

The reason we disclose these payments is because the trustee will recover any payments made before filing Bankruptcy of over $600 to any one creditor in the relevant time period, and then redistribute that money to all of the unsecured creditors.

Anything less than $600 I might be able to recover and exempt, but anything more than $600 is going into the pool of assets to be distributed by the trustee.

I understand that clients want to pay back the creditors who have been nice to them during times of financial distress.  I know that clients want to pay mom back so as to not involve her in the bankruptcy.

Clients often try to payoff debts to particularly nice creditors prior to filing.  This is especially true of clients who have debts with doctors who’ve been patiently accepting partial payments, or debts with credit card lenders who have been willing to negotiate.  Unfortunately, the bankruptcy code was not written to help debtors pay back certain debts but not others.  It was written to treat creditors equally.  I will explain how this works when we meet.  But know that you can’t avoid this!

Clients who’ve paid money back to ordinary creditors say, “If I’d have known that the money I spent would ultimately go to the credit card companies that treated me like a deadbeat, I would have filed X months ago.”

Clients who’ve paid money back to insider creditors have a whole other issue (and possible solutions) that I need to explain when we meet.