We all have our preferences, and sometimes we may unconsciously or consciously lean towards something rather than another. This can be applied to almost anything in life, from food to people, and in this context, even our creditors.
When you owe money to several creditors, you may or may not realize that you’ve focused your attention and money towards one specific creditor and have ignored the others. This is referred to as preferential debt payments, which involve a payment made to a particular creditor shortly before you file for bankruptcy.
Financial troubles can be very stressful, and if you don’t have any assets or savings to pay off any of the outstanding debts, then you may have no choice but to file for bankruptcy. Although filing for bankruptcy may seem to be the most obvious and affordable solution, there are certain things that you have to keep in mind before doing so.
One of these is referred to as preferential payments, mentioned under the Bankruptcy and Insolvency Act.
What are preferential debt payments?
Preferential debt payment is a payment that is made for the benefit of certain creditors shortly before filing for bankruptcy. This ties back to preferences or priorities which are created, and cause us to lean towards and prefer one creditor over another.
It’s also possible that you may owe money to a friend or family member and feel the need to settle that debt with any financial means that you currently have. You may feel obligated or inclined to pay back some individuals before others.
If you do choose to pay back a loan or debt to a preferred creditor shortly before filing for bankruptcy, it can be considered a preferential debt payment. For example, if you borrowed money from a family member, and you use some or all of your money earned from selling a house to pay off your debt before filing for bankruptcy, it can be considered a preferential payment.
If it’s determined that a preferential debt payment has been made, the bankruptcy trustee can recover the preferential payment, also known as a clawback, so that it can be fairly distributed among all of your creditors. Preferential payments are not illegal unless they are made with the intent to hide money from the trustee.
Irrespective of the intent, a preferential payment will have to be returned so that it can be fairly distributed among all your creditors. Clawbacks are ways to help ensure fairness among creditors. This is because a preferential payment prior to bankruptcy would result in a smaller payment made to each creditor, rather than if the preferential payment was also included in the amount being distributed.
When is a payment considered preferential?
Preferential payments can be of concern when you are filing for bankruptcy. It’s important to understand what is considered a preferential payment. This could include:
Payments made within 90 days of filing for bankruptcy
If you make a payment that is over $600 total to a preferred creditor in the 90 days prior to filing for bankruptcy, and if this payment to the creditor is greater than what they would receive through your bankruptcy, it is considered a preferential payment.
Payments made to family or friends within one year of filing for bankruptcy
When you owe money to individuals, who are considered insiders such as your friends, family, or business partners, the same criteria regarding payment apply as well. However, the period prior to filing for bankruptcy is greater in this case. Payments to insiders are considered preferential payments if they are made within one year of filing for bankruptcy.
When is a payment NOT considered preferential?
In some cases, an individual dealing with various debts may not be working alone. Having financial support can be a huge blessing. If a close third party relative — such as a family member — makes a large payment to an unsecured creditor on your behalf in the period prior to you filing for bankruptcy, then you haven’t done anything that can be considered a problem.
The fraudulent preference section, which is described in the Bankruptcy and Insolvency Act, is aimed to prevent individuals from purposely paying off one or more specific creditors and not others, which can be considered preferential. However, if a family member has paid one of your creditors, then you have not done anything that could be considered questionable.
What does it mean to file for bankruptcy?
Filing for bankruptcy is a legal process that can offer individuals who have financial problems with immediate financial assistance and a stop to any legal actions which are being taken against them by creditors.
If you do not have any assets, savings, or surplus income, and will not be able to pay the debts you owe to your creditors, you would just pay a basic fee to the trustee. When you file for bankruptcy, you are released from most or all of your debts.
Although this may seem like a quick and simple solution to your financial problems, there are a few protocols that must be followed to ensure the authenticity of the bankruptcy filing before any debts can be excused. These procedures include:
- 2 counselling sessions
- Submit monthly budgets to the trustee
- Provide information to your trustee to file your taxes.
Other things can happen but usually payments, counselling, budgets, and taxes are all that is required.
The bankruptcy process aims to provide individuals suffering from financial troubles with a fresh start and to ensure that the individual’s assets are fairly distributed between their creditors.
There are a few assets that are exempt from bankruptcy in Ontario. This means that not all of your assets have to be signed over, and you can keep some items. These assets include:
- Most RRSP and pensions
- Personal effects and household items within reason
- Most insurance policies
- A basic vehicle
- Tools required for work
How can I avoid making a preferential payment?
If you intend to or have already made a preferential payment to an insider individual or to a specific creditor you may want to see a lawyer first.
If the time prior to filing for bankruptcy falls outside of the specified preference periods, then it’s unlikely that the payment will be considered preferential by the trustee. It’s important to follow all of the guidelines outlined in the Bankruptcy and Insolvency Act to ensure that all your financial activity lines up with the appropriate criteria for bankruptcy.
If you intentionally try to defraud your creditors or hide any assets, you can face criminal charges and lose the benefits of being discharged off all of your debts.
If you are considering filing for bankruptcy, it can be a stressful time for all individuals involved and affected. If you ensure to avoid preferential payments and follow the correct steps when filing for bankruptcy, then the outcome can be a great way to start fresh. Your debts will be eliminated, and you will no longer owe your unsecured creditors.
To learn more about preferential payments to creditors and how they can affect filing for bankruptcy, call Kevin Thatcher & Associates at 1-888-329-5198 or contact us here.