Preference Debt Payment

Bankruptcy is filed to help people pay their debts through their assets and other money in their accounts. Some people decide to pay their debts to other people apart from main creditors that should be paid for through bankruptcy. While there should be nothing wrong in paying debts, the bankruptcy court sees it as an offense and labels the payment as preferential debt payment.

Preference Debt Payment

What is Preferential Debt Payment?

A preferential debt payment is the amount of money paid to an insider or non-insider within a timeframe before an individual files for bankruptcy. It leaves an impression that the person filing for bankruptcy is prioritizing another individual for debt payments rather than giving creditor a fair process of paying the collected debt.

An insider is any individual or another entity that receives payment before filing for bankruptcy. The bankruptcy code defines an insider as someone who has control over the debtor. This control is due to the debtor’s relationship to the insider, causing them to get paid first than other creditors, who don’t have direct relationship with the debtor. An insider can be a family member, employer or other entities depending on the type of debtor. An individual debtor has his family members as the main insiders while corporate debtor includes company directors and executives.

A debtor can also pay a non-insider. While the non-insider and debtor doesn’t have a solid relationship that results to possible control, the latter still preferred to pay the former first and deprive other creditors the portion of the money for their payments.

When Does a Payment Become a Preference Debt Payment?

A payment to an insider becomes a preference debt payment if it was received within a year before filing for bankruptcy. For example, if an insider receives payment now then filed for bankruptcy three months after, then it becomes a preferential payment.

A payment for a non-insider becomes a preference debt payment if the debtor pays the former within 90 days before declaring bankruptcy.

Most people think that the bankruptcy court won’t detect such payments. However, it will be easy for them to find out about these payments as trustees will examine bank records and transaction receipts as part of the bankruptcy filing process. They can easily spot the payment then identify it as a preferential payment.

What Would Happen in Cases of Preferential Payment?

A preference debt payment gives the court the right to sue the individuals or entities that received the payment within the said timeframe. They will sue the recipient to recover all the money paid within that duration. The recovered money will then be used to pay creditors. This can be problematic for some payment recipients because they may not have the money anymore and would be forced to produce it for recovery. Moreover, this may give creditors the right to keep a debtor from being discharged of bankruptcy.

Some people don’t know that they’ve made a preferential payment. A person thinking of filing for bankruptcy must consult with a bankruptcy attorney to avoid their past payments from being labeled as preference debt payment.