If you owe money but know there’s no way you’ll ever be able to pay it back, you may feel guilty. You may worry not only what happens to your credit, but also what it means for your creditors to not be paid. In an honest attempt to make good on your debts, you may consider making some payments to certain creditors. This is understandable, but it could also be seen as “avoidable preferences.” The money you’ve given to a selected creditor should have been evenly distributed among all your creditors. To accomplish this, the court trustee will sometimes take back payments you’ve made to creditors as your bankruptcy is being resolved.
While it’s not considered fraud to make these preferential payments, it could be wasted money that could be better used in other ways, such as growing your emergency fund. The trustee will look at the circumstances of your case, including who received the payment or property as well as the value of the transferred belongings, in order to determine how to handle the situation.
If you’ve made a payment to an “insider” such as a friend or family member who loaned you money, the payment is safe as long as it’s less than $600. Any payments you’ve made in the last year that are over $600 could be taken to pay back creditors. This does not apply to gifts you’ve given, unless giving away property was an attempt to defraud your creditors.
Payments to regular creditors, such as a medical company or bank, are handled differently. Payments of more than $600 that have been made in the 90 days prior to filing bankruptcy could be taken by the court to repay other creditors. Most of the time, however, amounts would need to far exceed $600 before the court would bother to take control.
People sometimes fear that the court taking money means they will have to come up with the payments again. This is not the case. The court trustee will pursue collecting the property or money from the creditor you paid. While this is good news for you, it may cause strained relationships if your friend or family member needs to give back money they were owed.
If you were not insolvent when you made the payments, there may be exceptions to the avoidable preference rule. In order to avoid having your payments taken, you’ll need to prove that your assets outweighed your debts. This can be difficult, especially as you are preparing to file bankruptcy. If you’d like to pursue this exception, we’ll work together to show correct documentation.
You also opinions that can help you avoid this situation all together. By postponing your bankruptcy until the 90-day period has passed, you won’t need to worry about creditors giving back payments. If it’s impossible for you to wait and you need to pay an insider, you may be able to pay them after you’ve filed bankruptcy, using money that is freed up as your other debt is discharged.
I regularly help people file bankruptcy, and I understand that most of the time they have honestly done their best to keep up with debt payments. I’ll help you come up with a plan to not only knock out your debt, but also make a new start with as much of your property intact as possible. If you have questions about bankruptcy, don’t hesitate to call to schedule a consultation.