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Voluntary Payments to Creditors Before Bankruptcy Can Lead to Problems


Even though you are filing for bankruptcy, you may think that you are being nice by paying some creditors before you file for bankruptcy. After all, what can be wrong with paying whatever creditors that you can, whatever amount you can? Certainly, the bankruptcy court would approve of your good faith effort to pay creditors before you file for bankruptcy…right?

Not so fast. Paying creditors off right before your bankruptcy can actually create huge problems in your bankruptcy – even if you’re trying to be nice.

Who You Can and Cannot Pay

You are allowed to pay whatever debts or creditors that you would ordinarily pay for, or which are necessary for you to survive. For example, there is nothing wrong with paying your mortgage, or paying whatever regular credit card payment you would normally make.

But when you make extra payments, or payments you don’t normally make, you can risk getting in trouble. This is because the bankruptcy court trustee’s job is in part to make sure that all creditors are being treated fairly.

Insider Payments

This is especially troublesome when the creditor being paid is an “insider,” that is, a friend, business associate or family member. Paying off a business partner, or your aunt, to make sure they aren’t left with nothing after the discharge can be considered fraudulent by the bankruptcy court. Again, in bankruptcy, your friends and family are treated no differently than big banks and distant creditors.

Clawback Suits

If you do pay a creditor more than you normally would, or treat one creditor better than another, the trustee can file a clawback suit. This is a lawsuit where the trustee sues whomever you paid in order to get what you paid back, and the trustee redistributes it fairly among all your other creditors.

Any payment made to a creditor within 90 days can lead to a clawback lawsuit. That time period is longer—up to a year—for any payments made to close family, friends, business partners or associates.

The first problem with clawback suits is this can lead to your discharge being severely delayed. The other problem is that if there is fraud suspected – such as where you pay a business associate or friend—you could be denied your discharge.

You may see your payment to your buddy as trying to save him from having the debt discharged and being unable to collect. The bankruptcy court, however, may see it as an attempt for you to hide your assets—that is, to pay a friend a debt, with a side agreement to get some of the money back later on.

The more practical problem is that you have now dragged whoever you paid—the family doctor, your buddy the mechanic, your business partners—into your bankruptcy as subjects of a lawsuit.

Avoid problems in your bankruptcy before they happen by getting good bankruptcy law advice. Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 for a consultation today.

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