You owed some money to a creditor. You knew you were going to file for bankruptcy and didn’t want to get them wrapped up in it.
So you paid them back. Right before going to see a bankruptcy lawyer.
The payment is considered a preference, but so what?
A preference in bankruptcy is going to trigger some additional disclosures, but a trustee has the right to step in and undo the transaction only in limited cases.
One such limitation hinges on the amount repaid and the type of debt you’ve got.
The underlying reason is pretty simple. If a trustee could go after every person regardless of amount and debt type, a payment of $10 to your Visa card issuer would be fair game. The trustee could get back the money, but there wouldn’t be much sense to it.
Consumer Debts And Bankruptcy Preferences
If you’re filing for bankruptcy and have debts that are considered to be consumer debts, then the trustee will add up the total of all payments and transfers of property. If the total amount of money plus the total value of property transferred is below $600, then the recipient will not risk being sued.
Non-Consumer Debts And Bankruptcy Preferences
If you’re filing for bankruptcy and have debts that are NOT considered to be consumer debts, then the trustee will add up the total of all payments and transfers of property. If the total amount of money plus the total value of property transferred is below $5,000, then the recipient will not risk being sued.
The Over-Under Matters Only Sometimes
If your transfers meet the appropriate threshold, the trustee can avoid (undo) the transfers pursuant to 11 U.S.C. §§ 522(h) and (i). If the creditor’s claim is going to be wiped out in your bankruptcy, the avoidance of the preference means nothing to you – it’s just a reallocation of money and shuffling of the deck chairs.
The problem, however, comes into play when you’re dealing with a massive debt that won’t be wiped out in your case. You’ve made a payment that will be avoided, which will increase the balance due to the creditor. When you come out of bankruptcy, you’ll owe more money to that creditor than when you went into court.
Different Solutions In Different Situations
I can’t tell you how every lawyer handles these problems, but for my clients I pore over the repayment history – especially for debts that won’t be discharged. If there have been payments within the avoidance period, I’ll probably have you wait until the 90-day cooling-off period is done. That way, you won’t have to worry about the money you paid to the student lender being avoided due to a preference action.
For other clients, I’ll file the case immediately. If we can file the preference action on our own and recover the funds for you, we’ll do that. And if we can’t recover the funds directly for other reasons, maybe a Chapter 13 is a good option.
In either case, it’s all going to come down to the information we get before filing the case. Together, we’ll work out a plan to put you in the best possible position.
Image credit: jasoneppink