Pre-Bankruptcy Payments

When you take out a loan, it is a promise that you will, in fact, repay that loan. When life happens and you are no longer able to keep up with your obligations, you may experience quite a bit of guilt over the situation. When people file bankruptcy, oftentimes they decide to try everything they can to make a few payments so that the lender will get some of their money back. Although I can appreciate your heart in this gesture, don’t do it. The court could see this as “avoidable preferences”. When you file bankruptcy, the court trustee does what they can to pay back each creditor fairly. If you make payments to one creditor, the trustee may go after them and those payments so that the money can be evenly divided among all those that you owe.

Avoidable Preference

 If you do end up making payments to one particular lender, it is not illegal and does not constitute fraud. However, the court trustee will assess those payments and will take a close look at who received those payments and the value of the payment.

If you make a payment to a friend or family member who loaned you money, that is fine as long as it is less than $600. If you have made a payment for more than $600 within the last year, the trustee could contact your friend or family member for that money back. This applies to debt payments, not gifts, unless a gift was in place for a debt that you owe.

 If you have made a payment within 90 days of filing bankruptcy, and that amount is over $600, the court trustee could take the money back. In most cases they usually won’t make the effort unless the amount that you paid was much more than $600.


Alternatives and Exceptions

 If you have made a payment, don’t worry; you won’t have to come up with the money again. The court trustee will go after whomever you made the payment to, not you. Even though this is the case, it is best to avoid the situation. It could strain relationships with loved ones.

 There are of course exceptions to this rule, such as if you were not insolvent when you made the payments. What this means practically is that you had more assets than debts. This could be difficult to prove to the court, and I will work with you to make sure we provide solid proof for the trustee to review. If this is the case, it might be the best choice to postpone filing bankruptcy until the 90-day period has passed. Of course, it is best just to avoid this entire situation. If you cannot wait to file bankruptcy, it is possible that the friends or family members may be willing to wait until after you have filed to receive their payment.


Your Advocate

No one plans on filing bankruptcy; often it is a series of unfortunate financial circumstances that lead to that point. Most people experience stress when they are not able to live up to their commitments, and if you find yourself in need of bankruptcy, I am here to help you deal with creditors and relieve that stress. Let’s get you back on the right foot and headed toward financial freedom.