Being Nice by Paying Creditors Can Lead to Problems
You have made up your mind to file for bankruptcy. You know that if your discharge is entered, that your debts will be discharged forever. But before that happens, you want to make a few extra payments to some of your creditors. After all, no court would have a problem with you paying a bill or two here and there—it would actually make you look like you’re trying harder to pay your creditors, and what can be wrong with that?
It turns out, this kind of thinking can lead to a lot of trouble.
Why Pay Creditors Before Filing
There are lots of reasons why someone may want to pay off a bill or a creditor here and there before filing bankruptcy. Some examples may be:
- To make sure that money owed to close friends or family aren’t wiped out in the bankruptcy discharge.
- To seem like a “nice guy,” or pay off creditors that you think have treated you “fairly.”
- To preserve a relationship with a creditor, such as a medical provider, who you will have an ongoing professional relationship with.
The problem with paying a creditor more than you normally would before a bankruptcy is filed is that bankruptcy seeks to treat all creditors fairly.
When you decide to, for example, pay off the family doctor’s bill a week before you file your bankruptcy, you are being unfair to your other creditors. The doctor is being paid, but the other creditors, receiving no payment after your discharge, will receive nothing. Of course it’s even worse when you opt to pay off a family member or friend. Then you really do seem like you’re preferring one creditor over another.
Paying one creditor before your bankruptcy can lead to what is known as a clawback action. In a clawback action, the bankruptcy trustee can sue the creditor that received the payment before the bankruptcy. The goal of the trustee is to get that money back, and apply it to all creditors equally.
If you made the payment to friends or family, they can end up involved in litigation with the trustee. In fact, payments to friends and family creditors not only can be recovered through a clawback action, but the court could see the transfer as an attempt to hide assets, leading to a denial of your discharge.
Time Limits and Limitations
A regular payment to a creditor that you have been making routinely usually won’t be a problem. It is the “one time” payment to a creditor that you had not paid in awhile that can lead to clawback suits.
Any payment to a creditor within 90 days of filing your bankruptcy can lead to a clawback action. A payment to an “insider,” a family member or friend or business associate, made within a year of filing, can be the subject of a clawback action by the trustee.
We can help you decide whether bankruptcy is right for you, or when it would be right for you. Call the West Palm Beach bankruptcy lawyers at Kelley, Fulton & Kaplan at 561-264-6850 for bankruptcy help.