Preferential Payments – The 90-Day Look Back Period

For many people, filing bankruptcy is the last alternative after exhausting all other means to pay their bills. However, for some people, there is just no money left over each month after paying their living expenses to put toward bills. The individuals working for creditors may be sympathetic to your situation but the company they work for is not. Creditors do not care if you have suffered a financial crisis such as unemployment, divorce, the loss of a spouse or a medical emergency. They only care about being paid and they expect you to perform miracles or pull money out of thin air to make that happen. If you cannot pay them, then they will harass you by calling your home, contacting you at work and sending you threatening letters.

Filing bankruptcy is a welcome relief to creditor harassment and the anxiety, fear and frustration of being unable to pay your bills. However, the Bankruptcy Code does have certain restrictions and requirements that debtors must meet in order to be eligible for a bankruptcy discharge. Part of our job as bankruptcy attorneys is to review your entire financial situation and history to determine if there will be any problems associated with filing a bankruptcy case. One situation that we encounter in some cases involves preferential payments.

What is a Preferential Payment?

A preferential payment is defined under the Bankruptcy Code as a payment to a creditor for a pre-existing debt that is made within 90 days prior to the filing of the debtor’s bankruptcy case that allows the creditor to receive more money than it would have received under a Chapter 7 liquidation. If the creditor is an insider (i.e. a family member, business partner, stockholder, etc.), the look back period is increased to one year prior to filing bankruptcy. When a person files for bankruptcy relief, creditors having the same priority debt should be treated in a fair and equal manner.

Preferential payments made right before a bankruptcy filing can create a situation where one or more creditors receive better treatment than other creditors who are similarly situated. For example, if a debtor pays a large lump sum payment on a credit card account two months before filing bankruptcy because the creditor was threatening to file a lawsuit, that creditor received a preferential payment that it would not have received had it not been threatening a lawsuit. This is not fair to the other creditors who received no payments because the debtor used all of his or her money to pay only one creditor.

The bankruptcy trustee looks at the payments made to creditors within 90 days (or one year for insiders) of filing bankruptcy to determine if any preferential payments were made. This does not apply to secured debts such as mortgages and car loans as those creditors must be paid by the debtor if he or she intends to retain the property. If the trustee discovers preferential payments, the trustee can file an action within the bankruptcy court to recover those payments from the creditor. If the trustee is successful, the debtor will not receive the money but the trustee will use the funds to pay the unsecured creditors on a pro-rata basis so that all of the creditors are treated fairly.

In some cases, a payment within 90 days may not be a preferential payment. If the payment was in the ordinary course of business or for new value, the trustee may not be able to recover the payment. Our attorneys will discuss any payments you made within the 90 days prior to filing bankruptcy to determine if those payments should be reported in your bankruptcy schedules.

Contact an Experienced Radcliff and Elizabethtown Bankruptcy Attorney

We’ve Helped Thousands of KY Families, we can help you!

The bankruptcy attorneys of Musselwhite Meinhart & Staples, PSC have over 50 years of combined legal experience. If you are facing overwhelming debt and do not know what to do, we can help you. We represent clients throughout central Kentucky.

Contact us at our Radcliff and Elizabethtown Office in Hardin County at (270) 351-6032 or toll-free at 1-800-754-HELP to schedule a free bankruptcy consultation with one of our attorneys. You may also contact our office through our convenient online contact form.