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“Preferences” Around the Holidays

December 3rd, 2018 at 8:00 am

Do you feel like you should pay on or pay off a certain debt now, even though you’re behind on all your debts?  It may be dangerous to do so. 

 

Last week we explained how giving a significant gift before bankruptcy could cause problems during bankruptcy. This also applies to selling something for much less than it is worth. Such a gift or sale might possibly be considered a “fraudulent transfer.”

A similar problem could arise from paying a creditor before you file bankruptcy. That’s especially true if it’s somebody you want to favor or maybe don’t even see as a regular creditor. This payment might possibly be considered a “preference,” or a “preferential payment.”  This is today’s topic.

Your Desire and Ability to Pay a Special Creditor

Especially around this time of year you may be extra motivated to pay on or pay off a special debt. A relative, or a friend, may really need of the money. He or she may be pressuring you to pay.

You might be thinking about filing bankruptcy and you don’t want it to affect this person. So you pay him or her off thinking that would help. Or you do so because you don’t want the person to know about your bankruptcy, for whatever personal reason.  

Besides wanting to, you may be able to pay on a special debt this time of year more than usual. For many people because of the expenses of the holidays money is especially tight. But, as mentioned a couple weeks ago:

The month of December is the month that people receive more income than any other month of the year. [F]or at least the past 9 years U.S. personal income was the highest in December… .

You may be getting a bonus from work or more income from working extra hours or part-time job during the holidays. So you might be able to pay a special debt now more than at any recent time.

So you may have the desire and ability to pay a debt now, before filing bankruptcy. But it may not be a smart thing to do.

What Makes 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’d paid to this creditor earlier. See Section 547(b) and (c) of the U.S. Bankruptcy Code. 

This one-year look-back period is shortened to only 90 days for creditors that are not “insiders.” The Bankruptcy Code defines “insiders” basically as relatives and business associates, but the definition is open-ended. See Section 101(31). So it could include friends and just about anybody that you have a personal reason to favor. Your bankruptcy lawyer will advise you whether a potential preferential payment was to an insider or not.

Your favored creditor could be required to return the money (or other form of payment) that you’d paid. The money would usually not be given to you but to your bankruptcy trustee. The trustee would then distribute it among your creditors.

The result: instead of satisfying your favored creditor as you’d intended, you could have an unhappy one. This is not.

What’s the Point of All This?

Preference law is related to one of the most basic principles of bankruptcy—equal treatment of legally similar creditors. People or businesses which are financially hurting must be discouraged from favoring any of their creditors before filing bankruptcy. Otherwise they would—the theory goes—pay all of their last money or other resources to their favored creditors, leaving nothing for the rest of the creditors. Under preference law, if they do so within the 365-day/90-day look-back periods, those payments made to the favored creditor could be taken back from that creditor. This disincentive is supposed to make the situation fairer to all the creditors.

“Preferences” Can Be Frustrating, But They’re Avoidable

“Preferences” are relatively rare problems in consumer bankruptcy cases, partly because they are relatively easy to avoid. Next week we’ll give you a scenario showing a potentially preferential payment made during the holidays, and practical ways to avoid it.

 

Bankruptcy Timing and the Holidays: “Preference” Payments

December 16th, 2015 at 2:00 am

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.  

 

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210-342-3400

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