Preferential Transfers to Creditors

Alabama Lawyer Knowledgeable in Bankruptcy Proceedings

If you decide to file for bankruptcy, you will not be able to decide which creditors get paid back first. Many debtors have received loans from family members or close friends that they would prefer to pay back before paying off debts to businesses or others who are less meaningful to them. However, paying certain creditors before filing for bankruptcy may be a preferential transfer, and the trustee can avoid such payments, recovering what you paid to redistribute among the creditors listed in your petition. Preferential transfers to creditors are not permitted. At Grainger Legal Services, an Alabama bankruptcy attorney can offer you sound advice on your debts, preferential transfers, and filing for bankruptcy.

Preferential Transfers to Creditors

Preferential transfers are payments made in order to benefit specific creditors before a debtor files for bankruptcy. In bankruptcy, all creditors are to be treated equally. If you pay more than $600 to a creditor during the 90 days before you file for bankruptcy, you are insolvent at the time of payment, and therefore the creditor receives more than what it would have received during your bankruptcy, it will be considered a preferential debt payment.

A preferential payment is only illegal if you made it with the intent of hiding money from your trustee, or for the purpose of committing fraud on your creditors. However, if you have an intent to defraud or hide money, you risk criminal prosecution, and you may not get a discharge.

The 90-day period is extended to a year for insiders such as your business partners, family members, or friends. This means, for example, that if you repay more than $600 to your mother at any time in the 12 months before filing for bankruptcy, the transfer can be avoided. However, those in this group are only insiders if they are also creditors. Simply providing a gift to one of these people in the year before filing for bankruptcy does not permit a trustee to take back the transferred property, unless the debtor made the gift to defraud creditors or hide some aspect of the debtor’s property from the trustee. Generally, if most of your debts have grown out of your business, the trustee only looks at transfers worth more than $5,850.

When a payment is avoided, the trustee can get the money back, reversing the transfer and redistributing it to the creditors identified in your petition. The thinking behind this rule is that if you have depleted your potential bankruptcy estate for a preferred creditor, other creditors may not get paid as much as they would have received in bankruptcy.

Preferential transfers are not only monetary transfers. They may include the transfer of assets or property such as real estate, a car, or personal property, which might otherwise be sold to repay your creditors during bankruptcy.

Generally, you are presumed to be insolvent during the 90 days before you file for bankruptcy. You are insolvent if you are unable to pay your bills as they become due. However, if you were not insolvent when you made a preferential transfer, the payment or transfer is not one that the trustee can avoid.

Protect Your Rights by Enlisting a Bankruptcy Attorney in Alabama

If you are concerned about a preferential transfer getting avoided, you should wait until a sufficient time passes to file for bankruptcy. However, many debtors do not have the luxury of waiting, and they must file as soon as possible to avoid their wages being garnished or a lawsuit. At Grainger Legal Services, an Alabama bankruptcy lawyer can provide thorough advice and representation to those considering bankruptcy, including advice about preferential transfers to creditors. We represent people throughout the state from offices in Montgomery, Prattville, and Troy. Call us at (334) 260-0500 or contact us online to schedule a free consultation with a debt relief attorney.