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What is a preferential payment?

We meet people from all walks of life, with varying financial situations.  We understand that many people consider filing for bankruptcy months before they actually file for bankruptcy.  For some people they are trying to find alternative options because they are worried about the stigma of bankruptcy.  We’ve actually found that the stigma isn’t nearly what it used to be and in some cases our clients see their credit scores increase shortly after filing.  Others have told us they worry about the expense of filing.  If that is what is concerning you please come talk to us.  The consultation is free and you have no obligation to proceed.  However, if you decide to proceed we can discuss convenient payment plans and how to best fit your needs.

No matter what the reason, this sometimes leads to payments being made on accounts.  We always advise our clients against making large payments prior to bankruptcy because these can be considered “preferential payments” and can be reversed by the bankruptcy trustee.  People do this for a number of reasons.  Some want to avoid listing certain creditors in the bankruptcy.  Others make payments to get a creditor to leave them alone.  No matter the reason, please consult us before making a large payment. 

We mentioned that the trustee can reverse them.  Basically, what that means is that the trustee can get that money back from that creditor and can redistribute it to other creditors, less his or her fee.  In a case where there were otherwise no assets you may have just given money to the bankruptcy that you wouldn’t have been required to give.  Either way, if the trustee takes that money your goal of paying that particular creditor will not be accomplished.

Interestingly enough, there are some cases where the trustee does not seek to reverse those payments.  All hope is not lost for that money.  There are provisions that allow a debtor to avoid (or reverse) the payment to the creditor and he or she may be able to have the money returned.  However, this is an adversarial bankruptcy action and you may incur more legal fees to have the money returned, assuming at the close of the case that it would in fact be returned.  Of course, the safest method is to call before making any large payments and/or to avoid large payments.  Now, we’re not saying ignore payments.  What we mean by “large” is making payments over and above what is required.

If you have questions about this, or any other bankruptcy matter, contact your St. Louis Area Bankruptcy Attorney Today!


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