What Is Preference In Bankruptcy In Canada?

Financial Responsibility

When declaring bankruptcy in Canada, your trustee goes through the initial process of assessing your liabilities and assets. From there, your trustee deals with your creditors until you get your bankruptcy discharged.

What are preferences in Bankruptcy?

However, timing is everything when you file for bankruptcy. If you made payments to your creditors before filing for bankruptcy, these payments could be considered as a “preference.” Let’s take a closer look at what bankruptcy preferences entail and if it can apply to you.

What is considered a preference in bankruptcy?

Bankruptcy preferences are payments you made before a specific period before you filed for bankruptcy. If you are in this position, your bankruptcy trustee might be able to reverse the payments back from your creditors. This process is called “avoiding” the transfer.

It is important to state that not every payment before bankruptcy is considered a preference. Generally, preferences are deemed as unfair payments to specific creditors. Bankruptcy preferences refer to the transferring of funds to a creditor within three months before filing for bankruptcy in Canada. These creditors who received payments were preferred at the cost of the additional creditors.

Payments Made to Creditors

Within 90 days of filing your bankruptcy, if your debts exceed your assets and you pay a creditor, this payment may be deemed a preference if they received more money than the rest of your creditors.

Payments Made to Insiders

An insider is considered someone close to you, such as a family member, spouse, or business partner. If you make a payment to any insider one year before filing for bankruptcy, it will be considered a preference.

What happens when you make preference payments?

The main idea of bankruptcy is that all of your creditors get treated fairly. If you give one creditor priority over the others before filing for bankruptcy, this gives other creditors unfavourable treatment. When this happens, your trustee can void transfers.

In the case when a trustee can void a transfer, they can get back the funds you paid from the creditor. The first step starts with the trustee requesting the creditor to give back the money. If the creditor rejects the request, the trustee can file with the bankruptcy court to force the creditor to return the money.

In your position as the bankrupt, it’s advised to go along with your trustee. You will not be responsible for recovering the money from the creditors. Rather, leave this up to the bankruptcy court to decide.

How to Prevent Transfers from Happening Between Your Trustee and Insiders

It might seem convenient for your trustee to work hard to get your money back from a creditor, but it is a different story if your trustee tries to get back the money you paid to your insiders.

Here is an example. You borrowed $1,000 from your mother to pay for your car insurance. The following year you got a tax refund of $1,000, and you paid back your mom. Six months later, you decide to file for bankruptcy. The trustee tells you they plan to get the $1,000 from your mother and use it to pay your unsecured creditors.

If you end up in a similar situation, here are some solutions you can explore if you do not want your trustee to file a lawsuit on your mother for $1,000.

  1. Wait a year before filing for bankruptcy

    When it comes to paying your insiders, wait at least one full year before filing for bankruptcy. Since insiders are people you are close with, they probably know about your financial issues. Give them a heads up about your plans about filing for bankruptcy when you pay them back so that they are aware of the timeline.

    Remember with insiders; it’s not a 90 day grace period – it’s a full year or more. Regardless, to be on the safe side, wait longer than 12 months to avoid preference bankruptcy with your insiders.

  2. Talk to your trustee

    Talk to your trustee about your insider’s financial situation. They may not have the income to pay you back. Express to them that they do not have assets or expendable income. Your trustee won’t want to invest their time and resources to serve them in bankruptcy court.

  3. Talk to your insiders

    Talk to your insiders about repaying them until after you have filed for bankruptcy. This way, there will be no chance that your trustee could request a transfer of payment.

  4. Offer a payment plan

    Offer your trustee a payment plan to pay a reduced amount yourself. Your trustee is there to work with you and won’t be concerned about where you get the money from, as long as you make arrangements to pay it.

    For example, you can arrange to pay back the $1,000 or even $800. Just be sure to offer a sum of money that you can afford. You and your trustee can create a monthly payment plan or even bi-monthly payments. Also, a payment plan is better than having your insiders get a request to pay the amount to the trustee.

The Bottom Line on Bankruptcy Preferences

The bottom line about bankruptcy preferences is that you have to take into account the timing when you make payments to insiders and your creditors. Prior to filing for bankruptcy, you should be aware that your bankruptcy trustee could get the money back from the payments you made to your creditors and insiders. This process is called “voiding” the transfer.

Filing for bankruptcy does not mean bankruptcy preferences can work in your favour. If you paid back the money you borrowed from your insiders, such as family members or business partners, less than a year of filing for bankruptcy, your trustee could review those insider payments and request that they pay it back.

If you require additional information on when to file for bankruptcy in Toronto, the GTA, or Southern Ontario, we’re here to help.

To learn more about bankruptcy preferences in Toronto, call Kevin Thatcher & Associates at 1-888-329-5198 or contact us here.

Speak to an expert today.