A fairly typical case came across my desk recently: the
debtor was a single mother whose marriage fell apart. Her parents had
paid the down payment on the couple’s condo. As part of the marriage
dissolution, the condo got sold, and the wife paid her parents back –
about $20,000, paid in April. No one drafted any legal documentation of
this loan, and the payment was directly from the single mother’s bank
account, not through the escrow.
Because of other issues, the debtor needed to file
bankruptcy right away, in August. The trustee noticed the payment and
asked for it back.
This kind of payment is called a
“preference,” because it shows a debtor “preferring” to pay one creditor
over another just before filing bankruptcy. Preferences belong to the
bankruptcy trustee, who may recover them and pay them out to the
creditors.
Generally, a preference is any payment on an
antecedent debt (that is, a debt that was due and owing for some time
before the payment was made) within the last 90 days before the
bankruptcy filing. Here, however, even though it was outside the 90-day
period, the payment was a preference because it was made to an insider -
the debtor’s parents. For insiders, the preference period is a full
year.
Creditors often feel that the preference law is unfair,
and in a sense, it is. If a creditor works hard to get paid, that
payment can be clawed back into the bankruptcy estate with no wrongdoing
on the creditor’s part. It’s not fair to the hardworking creditor.
To the other creditors, however, it is generally fair. If a debtor is
having problems, we don’t want creditors to race to fleece the debtor,
and we don’t want the debtor to pick and choose which creditors get
paid.
Trustees recover the preferences through filing a special
lawsuit in bankruptcy court. There are a variety of defenses, including
payments made in the ordinary course of business, or payments made in
exchange for contemporaneous value.
If you’re a debtor, disclose
all recent payments to your attorney; generally, they can help
strategize. In the case of the single mother above, there was a
possibility to keep from filing her case until a year had passed after
the payment to her parents, but there were issues with another creditor
that required a quick filing. If you’re a creditor facing a trustee’s
preference action, speak to an attorney, you may qualify for one of the
defenses, and the trustees are usually willing to negotiate a settlement
that works.
If you have any preference issues in bankruptcy, please call our offices so we can help you.