When you file for bankruptcy, it’s important to understand that there are a considerable number of people who will seek the compensation you owe them. As such, there are rules in place to ensure that creditors are treated fairly when seeking the funds they are owed. If you make payments to one creditor over others, these could be considered preferential and result in trouble for your case. The following blog explores what you should know about preferential payments, including what constitutes them and how to proceed if you believe you’ve made one of these payments. In addition, you’ll learn the importance of working with a Memphis, TN consumer bankruptcy lawyer to help you through these complicated matters.
What Constitutes Preferential Payments?
When you are approaching bankruptcy, you may want to pay off as much of your debt as possible to reduce how much you owe during this process. However, it’s important to understand that when you file for bankruptcy, the court will examine your past transactions, including payments made. As such, if you have paid certain creditors within 90 days of your filing or paid back business partners, family, or friends within one year of your filing, this can be considered a preferential payment. These payments ultimately impact how much other creditors could have received at the time you formally file your case.
It’s important to understand that your normal bills, such as rent, utilities, and groceries, will not be held against you. However, if you are paying past rent, this would be considered a debt and thus a preferential payment. As such, you should only pay your current bills and avoid making payments on any past debts to avoid being accused of preferential payments.
Generally, a payment can be considered preferential if it is made within the aforementioned timeline, the debt is insolvent, and the creditor receives more money from the payment than they would have during Chapter 7 bankruptcy.
What Happens if I’ve Made a Payment?
In the event you’ve made a preferential payment, understanding what can happen is critical. In some instances, such as payments totaling more than $600, the bankruptcy trustee assigned to your case can “claw back” or force the creditor to return the money so it may be distributed with the rest of the funds to all creditors to ensure fairness. Should the creditor refuse to repay the funds, this can result in a lawsuit against the creditor to recover the funds they received prior to the bankruptcy filing.
If you are considering bankruptcy, it’s in your best interest to discuss your circumstances with an experienced bankruptcy attorney. At the Arnold Law Firm, our team understands how difficult these matters can be to navigate, which is why we will do everything in our power to help you fight for the best possible outcome. Contact us today to learn how we can assist you.
