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You are here: Home / Bankruptcy Advice / Bankruptcy Timing and the Holidays: “Preference” Payments

Bankruptcy Timing and the Holidays: “Preference” Payments

December 16, 2015 by Mikel Erdman

You may have extra motivation and greater ability to repay a personally important debt this time of year. But maybe you shouldn’t.

 

Careful about Paying a Favored Creditor

Around the holidays you may be extra motivated to pay back a personal loan. The relative or friend may be in real need of the money and pressuring you to pay it. Or if you are considering bankruptcy you may not want it to involve this person, or to have him or her know about it.  

You might feel be better able to pay this debt. You may have gotten an annual bonus from work, or more income from working extra hours or a side job during the holidays. You might have even stopped paying other creditors so you have more money to pay who you want.

But when you know the possible consequences you might not want to pay that special debt after all. At least not yet.

The Rare, Dangerous, but Avoidable “Preference”

“Preferences” are among the most frustrating situations in bankruptcy. They seldom happen but are a major headache when they do. Especially because they can usually be avoided, they are worth understanding. That’s especially true during the holidays.

The Definition of a “Preference”

If during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you had paid to this creditor during the earlier period.

In other words if you pay one (or more) special creditor(s) during the year before filing bankruptcy, that person (or business) could be required to return that money. The money would usually be returned not to you but to your bankruptcy trustee, to be re-distributed among your creditors. Instead of having a satisfied favored creditor, you could have a very unhappy one. You may even feel compelled to pay that person AGAIN to make up for the money taken away from him or her. Either way, not a good result, one you want to avoid.

The Purpose of “Preference” Law

The reason for this is to promote one of the basic principles of bankruptcy law—legally equal treatment of creditors. As a result people in financial trouble are discouraged from playing favorites among their creditors for a certain period of time before filing bankruptcy. In theory that makes the situation overall more financially fair to all the creditors.

A Holiday Scenario

“Preferences” make more sense by example. Imagine that you owe your brother $2,500 from money he lent you a couple years ago when you didn’t have the money to pay your mortgage or rent. You were supposed pay back that loan long ago but you just haven’t had the money. He now really wants the money. Because of a bunch of late year overtime and because you’ve stopped paying other creditors you’ve scraped together the money to pay off this debt. But here’s what would happen if you did so and then would file a bankruptcy case within the following year.

A month or two after filing bankruptcy the bankruptcy trustee would very likely demand that your brother pay $2,500 to the trustee. If your brother didn’t, the trustee would likely sue him to make him pay. Once he did pay, that $2,500 would be divided among your creditors according to a set of “priority” rules.

An Avoidable Problem

“Preferences” can be avoided simply by not paying your favored creditors anything during the year before filing. This includes both money and anything else of value.

“Preferences” Used in Your Favor

That one-year look-back period only applies to “insiders,” basically anybody who you would have a personal or business reason to favor. For creditors who are not “insiders” the look-back period is only the 90 days before filing. Particularly with these creditors the “preference” law can sometimes be turned around to use to your advantage because it can force a creditor who garnished your wages or got other money from you on the brink of your bankruptcy filing to return that money. There may be ways for that money to go to a debt you need paid, or possibly even back into your pocket.

But to distinguish between creditors who are “insiders” and those which are not, and to get the best result for you in this particularly complicated area of bankruptcy law, you truly need the advice and guidance of an experienced bankruptcy attorney. Preferable get this advice before you pay your favored creditor. But even if you’ve paid him or her, your attorney will help figure out and execute the best way for you through the situation.  

 

Filed Under: Bankruptcy Advice Tagged With: creditors, favored creditors, friends and relatives, pre-bankruptcy planning, preferences, preferential payments

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About Mikel Erdman

Mikel Erdman is the founder of MySMARTblog and RealtyBlogContent. He is a published author and speaking authority on topics including marketing automation and how technology can positively affect company and individual sales efforts.
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