Don’t let Payback be a matter of preference

Individuals hoping to pick and choose who they pay back before their bankruptcy filing may want to consult an attorney before making payments.
Under § 547(b) of the Bankruptcy Code, a “preference” is any transfer made by the debtor that meets the following
criteria: (1) the transfer is to or for the benefit of a creditor, (2) the transfer is for or on account of a prior debt owed by the debtor before said transfer was made, (3) the transfer was made while the debtor was insolvent, (4) the transfer was made either 90 days before filing the bankruptcy petition, or one year before the filing of the bankruptcy if the payment was made to an insider, and (5) the transfer enables the creditor to receive more than the creditor would have received either under a Chapter 7 case, or if the transfer had not been made at all.
If a preference is discovered, the trustee may go after the creditor to whom the payment was made, take back the amount of the payment, and distribute it amongst all of the debtor’s creditors. Preferences are most commonly problematic within the context of payments to friends or family. If a transfer is made to a non-insider, the debtor typically is concerned less about the effect on the creditor.
When the preference payment has been made to a friend or family member, there are several ways to handle the situation. Sometimes a debtor will wait until the one-year preference period has run out before filing their bankruptcy.
If the debtor waits for the preference period to run out, there be no issue regarding the payment.
It should be noted that the debtor will want to make certain of when the payment was made. A miscalculation of even one day can make the difference in whether a payment is a preference or not.
If the debtor absolutely cannot wait, another option would be to file a Chapter 13 case. Under Chapter 13, as long as the total amount paid by the debtor over the course of the Chapter 13 plan is at least as much as the debtor transferred, then no additional funds need to be paid, and the trustee will not pursue the matter with the transferee.
If a Chapter 13 is not an option, the trustee will attempt to retrieve the funds. Sometimes the trustee will allow
the debtor to stand in the shoes of the individual to whom the payment was made and allow the debtor to pay back the preference on the behalf of the transferee. Most trustees will allow the debtor about five months to pay the preference amount.

Hoglund Law Offices

Written by Hoglund Law

The attorneys of Hoglund law are licensed in Minnesota, Wisconsin and Ohio. Hoglund, Chwialkowski & Mrozik, PLLC is based in Roseville, Minnesota. In addition to handling cases involving bankruptcy & social security, Hoglund, Chwialkowski & Mrozik, PLLC handles faulty drugs and toxic exposure.

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