Preferential payments in bankruptcy–watch out.

Preferential payments in bankruptcy

One of the pre-filing discussions I have with all clients is about payments they have made to their creditors prior to filing. The payments I’m most interested in are those made to unsecured creditors as opposed to secured creditors.

I am looking for fact patterns that I think will trigger the attention of the trustee or creditor. For example I want to know about instances where a client has paid off a debt and then filed bankruptcy in the hopes that that the debt will be left off the list of creditors. I am also looking for instances where a client has paid off a debt using what would have been non-exempt assets.

These are two of the most common (and most treacherous) scenarios that I’ve described to illustrate the power of the court, and to emphasize why clients need advice from their bankruptcy attorney before they decide to make big financial decisions.

What happens if a client has used non-exempt assets to payoff a debt prior to filing?

In Chapter 7, there is a strong possibility that the trustee will want that money/asset back. In Chapter 13, creditors will want to be compensated through the plan at least to the extent that they would have been compensated in Chapter 7. The Chapter 13 Trustee will also want the money/asset back.

Why do Trustees want the money or asset back?
One of the fundamental underpinnings of the bankruptcy code is that creditors are to be treated equally under the code. That means that a creditor who receives a preferential payment must be divested of that payment so that the trustee can divide the payment equally among creditors.

Unless it amounts to allegations of fraud, preferential payments don’t adversely affect clients. Preferential payments hurt the creditor who received the money or asset.

For example, if within the relevant time period, you gave your mom the truck that you owned free and clear, to pay her back for money she lent you , and the truck was worth more than your state’s exemptions, you can bet that the trustee will want the truck (or its cash equivalent) back.

Payments to Moms are treated differently than payments to credit card lenders.

As such, there are two types of creditors and two different relevant time periods.

1. Payments made to “Ordinary” creditors within the 90 prior to filing. Ordinary creditors deal with you in arms length transactions–these are creditorslike AMEX and Best Buy.
2. Payments made to “Insiders” within the year prior to filing. An insider is a family member, friend, a corporate officer related to the debtor’s interests, etc.

There are also some defenses to these transfers that I will evaluate with you when we meet.

This is not something that you’ll want to hear about first at your court appearance. Take the time to consult with an attorney who will fully educate you about this area of bankruptcy law.

Call me, Attorney Shannon D. McDuffie at (404) 418-8879 to set up your consultation.