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Clawing back payments made before bankruptcy

Prior to filing for bankruptcy, a debtor may want to pay off debts owed to a friend or relative, or even to a special creditor, in order to preserve a valued relationship. Such payments, however, may be considered preferential debt payments under the bankruptcy code. The bankruptcy trustee has the authority to claw back preferential debt payments from the people you paid, and then to distribute those funds among all of your creditors. Payments of over $600 in aggregate to any one creditor in the 90 days before you file, if those payments allowed that creditor to receive more than it would have gotten in the bankruptcy, are likely preferential. Your family members, friends, and business partners are all considered insiders, and any payments made to insiders are preferential if made within one year of filing. If you’ve made either type of preferential payment and you want to avoid the trustee clawing it back, the best thing to do is to postpone your filing until after the preference look-back period has expired. The absolute worst thing you can do is to lie on your bankruptcy papers, which can lead to denial of your discharge and criminal prosecution.

Photo by Adam Wyman on Unsplash

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