Prior to making the bankruptcy filing, some debtors feel as if they have to make incredibly tough decisions, such as which creditors they can pay and which ones will not get the payment they’re owed. This generally occurs because the debtor doesn’t have the money to pay all of their creditors, so in their head, they rank which ones are the most important to pay first. In a case like this, the debtor might give preference to an aggressive creditor, but this could complicate their bankruptcy case if they prioritize paying a single creditor over another once they start their paperwork.
If a debtor makes a payment to one creditor over another, they can be considered preferential payments according to bankruptcy law. Although a debtor may have just been trying to do what they thought was best, the bankruptcy court and the bankruptcy trustee may not see it the same way.
bankruptcy not only protects debtors, it also protects creditors. The preferential payment rule exists to protect creditors, ensuring that they get as much as they can during the bankruptcy proceeding. The bankruptcy trustee assigned to the case will equally distribute the bankruptcy estate so that all creditors are paid the maximum amount possible.
The Bankruptcy Code on Preferential Payments
If you have made the decision that the best way forward is to file for bankruptcy, you want to consult with your lawyer before making a preferential payment. Your lawyer can help you avoid potential pitfalls within the Bankruptcy Code.
The rules of bankruptcy exist to ensure all creditors are paid fairly and to prevent creditors from unfairly pursuing a debtor at the expense of other creditors. If you file for bankruptcy and the court determines that you prioritized paying one creditor over another, the bankruptcy trustee assigned to oversee your case could go to the creditor, recover the funds, and distribute them evenly amongst the remaining creditors.
Whenever a debtor makes a transfer, pays money, or returns goods to an original creditor, that qualifies as a preferential transfer. The bankruptcy trustee can reverse the transfer to ensure that other creditors are paid.
What is a Preferential Payment?
Preferential payments include:
- payments made to one creditor on a debt that existed before the bankruptcy petition was filed
- payments exceeding $600 in the 90 days before filing, which is known as the preference period or look back period
- any payment that exceeds the amount that the creditor would have received in bankruptcy
- any payment that was not made in exchange for new value
- any payment that was not made in the ordinary course of business or financial affairs between the debtor and the payee
In addition, the Bankruptcy Code specifies that these payments must have been made to a non-insider creditor. These include creditors such as friends, family members, or business associates. If the payments were made to an insider creditor, the preference period changes from 90 days to within one year of the bankruptcy filing.
Talk to a Danville IN Bankruptcy Lawyer Today
Chris Arrington represents the interests of debtors in bankruptcy proceedings. Call our Danville IN office today to schedule an appointment, and we can begin discussing your next steps right away.