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What are Preferential Payments in Bankruptcy?

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What are Preferential Payments in Bankruptcy?

Prior to filing for bankruptcy, it is not uncommon for debtors to feel as though they have to make tough decisions regarding which creditors they can pay and which ones they can’t. This is usually because they don’t have the money to pay all of them, so they feel they need to rank which ones are more important to pay first. Unfortunately, this decision to prioritize paying one creditor over another can complicate their case should they decide to file for bankruptcy.

These payments made to some creditors over others can be considered preferential payments in bankruptcy cases. Though a debtor may have just been trying to do what they thought was best, the courts and your bankruptcy trustee may not see it that way.

Bankruptcy Code on Preferential Payments

Bankruptcy code is in place to ensure everyone is paid fairly. So, if you file for bankruptcy and it is determined that you made preferential payments to one creditor over others, the Trustee assigned to oversee your case could go to the preferred creditor, get the funds back, and distribute them evenly amongst your creditors.

The code more specifically defines preferential payments to a non-insider as:

  • payments made to a single creditor on a debt that existed prior to the time the payment was made
  • the payments exceeded $600 in the 90 days before filing
  • the total amount that was paid exceeds the amount that creditor would have received in bankruptcy
  • The payment was not made in exchange for new value
  • The payment was not made in the ordinary course of business or financial affairs between the debtor and the payee

Additionally, the code specifies that these payments must have been made to a “non-insider” creditor. An “insider” creditor would be friends, family, members, or business associates. If the payments were made to an insider creditor, the timeline changes from 90 days to within one year of filing.

Preferential Payment Reversals: A.K.A Clawbacks

If it is determined that a preferential payment was made, the trustee assigned to your case can reverse or “clawback” those payments to then evenly distribute them amongst all creditors. These clawback procedures are considered central proceedings in bankruptcy cases. Not everything can be resolved by a judge in bankruptcy cases unless it is a central proceeding, meaning clawback procedures can and will be resolved in the Bankruptcy Court. There is no way to avoid it if preferential payments were made.

Avoiding Preferential Payments in the Future

Though making preferential payments is not illegal, and you will not get in trouble for doing so, they are best avoided when possible. The only time a debtor can face charges for making preferential payments is if they intentionally made them to defraud a creditor. In this case, you may face criminal charges and risk losing the benefit of having your debt discharged through bankruptcy.

Typically, however, most debtors make preferential payments without realizing they are doing so or because they feel they have no other option. You will not be punished in these cases, but if you think that you may file for bankruptcy again at some point, it is something to keep in mind when you are determining how to pay each of your creditors.

How Sawin & Shea, LLC Can Help

If you are concerned about preferential payments affecting your bankruptcy case and aren’t sure what to do, it can be helpful to consult an experienced bankruptcy attorney. Bankruptcy lawyers handle cases like this every day and will know how to guide you through the process to ensure everything is done correctly.

At Sawin & Shea, we believe in providing compassionate and understanding representation to all of our clients and are determined to help you achieve the best possible outcome. Our attorneys are highly experienced in bankruptcy cases and are here to help you through the process every step of the way. If you have any questions about filing for bankruptcy, contact us at 317-759-1483 or send us an email for a free consultation.

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