Going bankrupt is not without a few sacrifices.
At Spergel we meet people every day who are reluctant to switch banks for varying reasons. Many are afraid of giving up overdraft protection (and other banking privileges) during the bankruptcy process. However, this is a temporary change that we advise you to make in order to protect your income. We understand it’s not easy to open a new bank account and leave an established account behind.
Making calls to move payroll deposits and automatic bill payments from your old bank to the new one can be a pain. Because of the headache factor, some people ignore the advice to leave their old bank account behind and pay off overdraft to avoid listing it as a debt. Here is what you should know about preferential payments and why it’s not ok to repay a significant overdraft (or any debt) right before filing bankruptcy.
What is a Preference?
Paying off an account in full prior to bankruptcy fulfills a commitment to one creditor over the others. Essentially this is “preferring” to pay one debt over the rest of your debt.
Using the bank account example, paying off a $1500 overdraft just to keep an account open may or raise a few eyebrows. Using a credit card from another bank to pay off the overdraft right before filing could definitely get some unwanted attention.
The risk? Your creditors may find out about the preference payment and contact your Trustee.
How can you avoid falling into a preference situation?
Leading up to the decision to file bankruptcy, don’t make financial moves that could be preferential. Your creditors review recent account history and activity once notified of your bankruptcy. Some may also review the last credit report and loan application history on file. Since you must honestly disclose your existing debts, assets and income when applying for a loan or credit card, they may have a pretty clear picture of how much you should realistically owe and to whom.
Your creditors can go back a full year to look at account history to confirm that the information included on your bankruptcy documents are matching up to their records. When a bank or credit card company finds a discrepancy or something strange in your recent history they will typically write to your Trustee and ask for an investigation into your conduct.
What happens if a creditor finds out about a preference and complains?
Your Trustee will investigate your conduct by speaking with you and informing you of the questions that have been asked. You will work with your Trustee to provide an honest response to the enquiry. Once your response has been received, the creditor will review and decide if there is any further course of action.
What can a creditor do about a preference?
A creditor has to right to pursue an unfair preferential payment. Fund transfers that could have been shared amongst all creditors may be reviewed and reversed. A creditor in receipt of a preference payment could be asked to return funds. After which, a distribution to everyone you owe is made. A common outcome when a preference is made close to the beginning or shortly after bankruptcy. When the preference is older, you may be asked to pay more to make it right with your creditors. A preference can complicate and lengthen the bankruptcy process in some cases.
For example, using one card to pay off another card. Your previously “paid” debt will be reversed and included in bankruptcy. After the payment has been reversed, debt owed to the advancing creditor will decrease.
If you want to be sure that you won’t run into problems like this, contact Spergel today for a free consultation. Call 310-4321 to discuss your debts and develop a plan that will lead you to debt freedom without any trouble.