Should I Repay Some Debts Before Filing for Bankruptcy?

 Posted on March 28, 2022 in Bankruptcy

If you are struggling with debts, you will want to determine the options for debt relief that may be available, including bankruptcy. However, as you prepare to file for bankruptcy, you will need to be aware of certain issues that could affect you. One factor that may be considered involves any payments that you made prior to filing for bankruptcy. In some cases, these may be considered “preferential payments” that could complicate the bankruptcy process and affect your ability to discharge your debts.

What Are Preferential Payments?

When preparing for bankruptcy, it may seem to make sense to make payments toward some of your debts and pay off some of what is owed to different creditors. However, the bankruptcy laws prohibit preferential treatment of creditors. Payments made to one creditor may affect other creditors’ ability to recover what is owed to them, and in some cases, some or all of these payments may need to be returned.

Generally, a payment to a creditor may be considered a preferential payment if it was made toward a pre-existing debt, the debtor was insolvent when the payment was made, and the creditor received more than they would have received through the liquidation of the debtor’s non-exempt assets in a Chapter 7 bankruptcy. 

There are certain time limits that may be used to determine whether payments to creditors were considered preferential. Payments made to credit card companies or other lenders are generally prohibited within 90 days before a person files a bankruptcy petition. However, this time limit is extended to one year for creditors who are considered to be “insiders” due to a close relationship with a debtor. For example, if you owe debts to a family member, you will be prohibited from paying off these debts within one year before you file for bankruptcy.

If you have made preferential payments, the bankruptcy trustee in your case may “avoid” these payments, meaning that they may require a creditor to return the amount you paid to them. In consumer bankruptcy cases, preferential payments of over $600 may be recovered by a trustee. However, if payments were made to satisfy a domestic support obligation, such as child support or alimony, they will not need to be returned.

Contact Our San Antonio Bankruptcy Lawyer

As you prepare to file for bankruptcy, you will want to make sure to avoid any issues that may complicate your case or affect your ability to receive relief from your debts. At the Law Offices of Chance M. McGhee, we can advise you on the types of payments you can and cannot make to creditors, including family members or friends to whom you owe money. We will also help you take the correct steps to complete the bankruptcy process successfully, ensuring that you can receive the fresh financial start you need. Contact our Boerne bankruptcy attorney today at 210-342-3400 to arrange a complimentary consultation and learn more about your options.

Source:

https://www.law.cornell.edu/uscode/text/11/547