If you’ve been reading my stuff, you know that I have a list of what I consider the top seven things you should avoid before filing a bankruptcy, either Chapter 7 or Chapter 13. This is the third in a series and is about item three on my list – making large payments to unsecured creditors.
The bankruptcy code follows the general principal that all your creditors are supposed to be treated equally – damaged equally in proportion to the amount of each debt. To try and level the playing field among the unsecured creditors, a limit is set on how much you can pay each one within the 90 days before the filing of your case. If you have paid a total of over $600 to any one unsecured creditor in the 90 days prior to filing the case, this is considered what they call a “preference.” Having a preference can slow down the administration of your case, not to mention that making those payments is a waste of your money. Save the money to pay your attorney fee and court filing fee.
A preference is considered to be one of your assets, but it’s not one you can claim as exempt. In a Chapter 7 bankruptcy case having a preference means that the trustee can claw the money back from the one creditor and distribute it equally to all the creditors. While this process is going on, your court file remains open and you are not able to start rebuilding your credit. In a Chapter 13 bankruptcy it means you may have to pay extra in your payment plan to make up for what the creditors would have received had it been a Chapter 7. In Chapter 13 they call that the best interests of the creditor rule. You can’t give the unsecured creditors less in a Chapter 13 than they would have received in a Chapter 7. Either way, whether it’s Chapter 7 or Chapter 13, the result is undesirable.
Once a case is filed, my goal is always to get out of the case as quickly as possible. So a preference is usually something I want to avoid. They way to avoid the issue to quit paying the unsecured creditors and wait until you have a 90 day period free of preferences. There are always exceptions. The preference might not be the worst thing in the world. For example, if there is a wage garnishment in progress I might say let’s get the case filed ASAP anyway.
When asked my clients almost always say that they have not paid over $600 to any unsecured creditor in the last 90 days. But then I point out that all you have to be doing is paying over $200 per month, and that will always add up to over $600 in 90 days. At that point a light bulb seems to come on and I learn that there is a preference hiding there somewhere.
Keep an eye out for the next episode – Item Four – Drawing Down your 401K.
I just love when this happens. I came in to the office this morning, checked the mail box, and here’s letter from one of the big bill collecting law firms. Often those letters can be some kind of bad news, but today the letter contained a check for over $1000 for one of my clients. This was a refund of the money that they garnished from my client’s pay check in the 90 days before we filed the bankruptcy.
So you might wonder how this can be. After all, once a bill collector takes your money isn’t is just gone? Most of the time it really is just gone, forever. An exception to the rule, however, can be money that was garnished or seized within 90 days before the filing either of a Chapter 7 or a Chapter 13 bankruptcy. The window for getting the money back is a pretty small one. It’s necessary to have all the following before any of the money can come back:
It must be a case where the amount seized in the 90 days is over $600. If it’s over that amount, it counts as what is called a “preference.” If it’s less than that, it doesn’t count at all.
It has to be a bankruptcy case where the debtor is using the federal exemptions.
The debtor has to have claimed the preference amount as exempt using the wild card exemption under the federal exemptions.
The bankruptcy trustee has to have not objected to the claim of exemption for the preference. The trustee has 30 days from the date of the meeting of creditors – what I call the hearing – to object to exemptions. So this means that the 30 day time period has to have expired.
You have to actually contact the creditor or the creditor’s lawyer and ask for the money back. If they won’t give it back, which is often the case, legal action can be taken to get it back. I tell my clients to not bother with the legal action, however, because the attorney fees would probably cost more than you would ever get back.
So what I tell my clients when we have this situation is that I will set up the bankruptcy petition so that the money is listed as a preference under assets and them claimed as exempt. When the 30 day exemption period expires, I will write a letter and demand the money. Then we wait and see if the money turns up. It only does in about half or less of the cases.
Many of the creditors are so nasty that they don’t care if the law requires them to give the money back. They know that nobody can afford to pursue them if they don’t. But I am always joyful to see that check come in the cases where they do.
This post is for general information purposes only and does not create an attorney-client relationship. It is not legal advice. Please consult the attorney of your choice concerning the details of your case. I am a debt relief agency helping people to file for relief under the federal bankruptcy code.