Preference Payments
The list of creditors that most debtors amass doesn’t make for particularly dramatic reading, or even elicit any particularly compelling pangs of remorse. After all, Discover Card and Bank of America can take care of themselves and have shown themselves (at least until recently) to be quite adept at protecting themselves against the losses imposed on them by a few by charging interest to the rest. But it’s not uncommon to see a different sort of creditor, one that sometimes bares the same name as the debtor, wedged between the more typical institutional lenders. It’s then that the black and white application of bankruptcy law and policy takes on the more vibrant colors of family loyalty and obligation, though often in ways that neither the individual facing bankruptcy nor the family creditor imagined. A bankruptcy case can be imagined as a judicially umpired dinner party where a debtor invites all his creditors to the table to receive whatever share of the meal the law grants them. State and Federal law allows, in the form of exemptions, debtors to keep some of their food locked away in the pantry. But principles of equity require that all creditors have to be invited to the dinner and that there can’t be any food given away before hand, whether it’s exempt food left in the pantry or food that ultimately find its way on to the table. This makes sense when the creditors seated at the table are Discover Card, Bank of America, Capital One, and the hospital. But when a debtor owes mom or dad money, our natural inclination is to break both these rules: (1) we don’t invite them to the table and (2) we serve them a special meal before the others arrive, leaving nothing but scraps for the institutional creditors to consume. This second tendency, to give special treatment to friends, family members, or business partners is called a “preference,” and can result in the judicial umpire (in this case, the trustee), suing the recipient of the payment to recover the money paid. Preference lawsuits are counter-intuitive. Debtors know, instinctively, that they ought to disclose all of their assets and income. But the fact that they and their family members could be punished for engaging in the sort of activity that anyone would do in their situation is hard to explain. When the long-awaited tax refund check arrives in the mail, it’s the most natural thing in the world to get caught up on the mortgage, get new tires for the truck, take the wife out for the first steak dinner in a year, and pay Uncle Billy back the $1,000 you borrowed last year when the truck broke down. And while paying Uncle Billy back would strike us as the most commendable of those actions, it is also the only one of those things that would be problematic in the bankruptcy context. Payments to family members or business associates within one year of filing for bankruptcy must be disclosed on your bankruptcy petition. If you have questions about payments you’ve made, be sure to speak with one of our attorneys.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
