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Can A Bankruptcy Trustee Take A Preferential Payment Back?

24 October 2016 by Richard Ramirez

The trustee has many responsibilities in a bankruptcy filing, including checking your financial history. As part of checking your history, the trustee is looking for any payments that were made to creditors in the months leading up to your filing. Depending on the nature of the payment and when it was made, the trustee might take action to get the payment back. If you are planning to file for bankruptcy and are thinking of paying off some debts before filing, here is what you need to know.

What Is a Preferential Payment?

A preferential payment, or transfer, occurs when you make certain payments to particular creditors in the year leading up to the bankruptcy filing. For instance, if you pay off a loan to your parents before filing for bankruptcy, this could be considered a preferential payment.

Whether or not a payment is considered preferential depends on several factors, including the recipient of the payment. Payments to recipients such as family and friends are usually closely examined. If you made the payments while you were insolvent or if they were disproportionately larger than other payments made to creditors, the trustee might view them as suspicious and label them preferential.

What Happens to Preferential Payments?

The trustee has the responsibility of deciding what happens with the payments made before you filed with bankruptcy. In some instances, the trustee might choose not to take action. However, there is a possibility that the trustee will opt to take legal action to get the return of the payment.

The trustee can send notice to the recipient and request that the payment is returned by a certain date. The trustee can even file suit against the recipient to get the funds returned.

What Can You Do?

There are only two options available to stop the trustee from going after the recipients of any payments you made. You either have to present a good defense as to why the funds should not be taken or you can pay the trustee the money yourself.

If you and the recipient are planning a defense, the reasoning for the payment has to be reasonable. For instance, if the payment was made for child support or alimony, it is doubtful the trustee will take action.

If you are planning to repay the funds yourself, the funds have to come from monies you have earned after the filing. Assets in your possession at the time you filed are considered part of your bankruptcy estate. As such, you have no control over those assets. Contact a firm like O'Brien and Dekker Attorneys at Law for more information and legal help about bankruptcy.

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