Typically, bankruptcy is filed by debtors who don’t have the money to repay all of their creditors. It may be considered a preferential payment if someone pays back one debt over another before filing bankruptcy. This can unfortunately complicate your bankruptcy case due to the many rules that are in place. Your trustee may be able to recover these funds and distribute them to your unsecured creditors. This article will help you plan your financial future by providing a deeper look at bankruptcy and preferential payments.
Bankruptcy Code Preferential Finance and Payment Code
Section 547 or the preferential payment rule states that if a debtor makes a payment to a creditor in the first 90 days after filing for bankruptcy, the court may force the creditor to pay the money back and distribute it among the other creditors. Paying certain creditors selectively can lead to some creditors receiving all or almost all of what they are owed, while others may get next to nothing.
Section 547 has two main objectives. The first is to promote equality and fairness in the handling of money by the court. Another is to make it harder for creditors who are aggressive to file lawsuits and pursue debtors.
What Is a Preferential Payment?
A preferential payment can be made to one creditor. Payments made within 90 days of filing for bankruptcy must meet certain criteria. The debtor must have more debts than assets. The total payment must be more than $600. The total payment must also exceed the amount that the creditor would receive through bankruptcy.
The debt must also have been incurred before the payment. The payment must also have been made to a creditor who is not an “insider”. Payments made to “insiders” or friends, family, or business partners within one year of filing, not 90 days, can be considered preferential.
How Trustees Get Their Money Back
When the court determines a preferential payment was made, the trustee can implement a “clawback” bankruptcy process that can be used to “avoid the payment” and recover the money. It doesn’t mean preferential payments were illegal. The only time they are illegal is if the payments are intended to hide or defraud creditors. The recipient still has to return the money so that the trustee can distribute it.
To recover a payment of preference, the trustee must prove that all elements are present. A payment like this is “avoidable”, even if there’s no dispute about the goods sold, services provided, or intention to accept or make money. Preference suits can be filed by trustees in bankruptcy court up to two years after the bankruptcy filing.
Defenses – When Money Cannot Be Repaid
The claims for preference payment are complicated. The money cannot be taken automatically. The creditor can use certain defenses to keep the money sent to them. The “normal course of business defense” can be used to defend payments that were made in the normal financial operations of a company and are typical for their industry. A “contemporaneous trade for new value” is another option. The debtor might have bought something new and the money is not a debt.
The “subsequent transfers of new value” defense applies when the bankruptcy filer buys new things but pays for them simultaneously. A preference payment can negate or offset the obligation to pay it back. The defenses of the ordinary course of business or contemporaneous exchange usually apply only to non-insiders; the trustee cannot take the money back even if the criteria are met.
What if You Made a Preferential Payment
You should not break the bankruptcy/preferential payment rules. If you’ve made a preference payment, you have little to no recourse. The trustee is likely to reverse the payment by using clawback. Even if you don’t get the benefit of making the payment in advance, it may be worth filing bankruptcy.
This post was written by Trey Wright, one of the best bankruptcy lawyers in Tallahassee! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, specializing in bankruptcy law, estate planning, and business litigation. Click here to learn more!
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