People who file bankruptcy often owe money to multiple creditors, and they often like some of those creditors more than others. For instance, if they owe money to a family member or business partner they have good reason to attempt to pay off the debts they owe them rather than the ones they owe to faceless banks. The bankruptcy code, however, doesn’t hold the same beliefs. Instead, it goes to great lengths to treat all creditors equally, including going so far as to recover payments debtors made to other creditors before filing bankruptcy. The bankruptcy code calls these “preferences,” but before the Trustee can compel the creditor to pay the bankruptcy estate, he or she must prove five things.
(1) The payment was to or for the benefit of the creditor
(2) It was for a preexisting (“antecedent”) debt owed by the debtor. This usually excludes contemporaneous purchases.
(3) The debtor made the payment while insolvent. The bankruptcy code creates a presumption that by filing bankruptcy, the debtor was in fact insolvent when the payment was made. The presumption shifts the burden to the creditor to show that the debtor was in fact solvent. This involves a balance sheet test, which in rare cases can turn to the creditor’s favor, e.g. when the debtor has significant assets but lacks the cash to make timely payments.
(4) The payment occurred in the 90 days before the debtor filed the bankruptcy petition, unless the creditor was an “insider” who was paid between one year and 90 days before the filing. This element can cause issues with when the petition was filed, such as circumstances in which the petitioner’s case is dismissed and then the petitioner reopens it later. The later date is considered the filing date in this situation.
(5) The creditor received more in the payment than it would have if the debtor had discharged his or her debts in a Chapter 7 bankruptcy. This element is fine most of the time, but problems can arise when the value of the bankruptcy estate isn’t easy to determine, is volatile, or if the creditor is less secured than others.
In most instances, the Trustee gets the preference, which can cause discord between the creditor and the debtor if they were close. The debtor has the option of reaffirming the debt, or even just repaying it after it has been discharged.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.