Bankruptcy legislation is a double-edged sword that tries to walk a fine line between creditors and debtors. The legislation is designed to give debtors relief from their debts while ensuring creditors get every cent possible from a debtor. To achieve this, the bankruptcy court doesn’t just look at your current finances. They also look back over the preceding 90 days. If you have made any significant payments (generally over $600) to any single entity, this is considered a preferential payment, and the court will examine this payment closely.
As a general rule, if you are in financial difficulties and feel that bankruptcy is a distinct possibility, then you shouldn’t make any ‘preferential payments’. If you need to, then clearly document the circumstances around that payment. Under no circumstances should you gift or lend money to friends or relatives during this period – they will be asked to return that money to your bankruptcy estate.
If your payment is related to a mortgage or car loan and you are under threat of foreclosure or repossession, then the courts will generally allow those payments. In most cases, normal mortgage payments are in excess of the preferential payment limit and are allowable, especially if you are trying to stay current with those accounts.
Where the court finds that you have made a preferential payment to an unsecured creditor, they may ask that unsecured creditor to return that amount to your bankruptcy estate. Bankruptcy is all about equity when it comes to unsecured creditors – that is, no unsecured creditor has a right to preferential treatment. They should all share in any distribution of funds, and that includes the 90 days preceding your petition for bankruptcy.
The moment you feel that bankruptcy is an option, take care in the way you handle assets, especially cash. Don’t favor one creditor (or person) over the rest – if the court feels you are trying to circumvent the bankruptcy legislation, it could dismiss your petition and perhaps even investigate you for fraud – and that’s the last thing you need if you are financially under water.
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