You’re drowning in debt, and you’ve decided bankruptcy might be your way out. Then a thought hits you. What if you pay off one of your loans before you file? Wouldn’t that solve at least one problem and maybe look better to the court? The answer is more complicated than you might think, and the consequences could actually hurt your case.
You can pay off a loan before filing for bankruptcy. This does happen, and it is not illegal under the right circumstances, but it can also be seen as fraud under the wrong circumstances. Before you try to pay off loans and may still need to file bankruptcy, check with Kain + Henehan, bankruptcy lawyers from St. Cloud, Minnesota, first to avoid potential problems.
Your Last-Minute Payment: Legal or Not?
Paying off a debt right before filing isn’t automatically illegal. You have the right to spend your money however you want, and creditors have no legal claim to stop you from paying them. But bankruptcy law has specific rules about what happens when you pay certain creditors shortly before filing. These rules exist to protect the fairness of the bankruptcy process for all your creditors.
Bankruptcy Fraud: What the Law Actually Says
Paying off a loan before filing isn’t automatically fraud, especially if it is an earnest attempt to reduce your debts before deciding to file bankruptcy. This happens at times when people have a lot of debt and are taking steps to resolve it, only to find they can’t resolve all of it. They file bankruptcy after the fact because their attempt to resolve their debts was unsuccessful, not because they were trying to hide assets.
However, the court will look at your motivation. If you paid off a family member’s loan while ignoring other creditors, or if you paid off a loan from a business you own, the trustee will question your motives. The bankruptcy system takes these situations seriously because they can indicate you’re trying to manipulate the process.
Preferential Payments Explained
Bankruptcy law has a specific term for payments you make to certain creditors shortly before filing. They’re called preferential payments. If you pay one creditor within 90 days of filing, the trustee can actually recover that money and put it back into your bankruptcy estate to be distributed fairly among all creditors.
This applies to most creditors. For family members, the lookback period is even longer, up to one year. So if you paid your brother back a loan within a year of filing, the trustee can recover that payment.
Why Creditors Get Special Treatment Before Filing
You might wonder why the law cares so much about who you pay right before filing. The reason is fairness. Imagine you have five creditors and only enough money to pay one of them in full. If you get to choose which one, you’d probably pay your friend or family member. But that’s not fair to the other creditors who are owed money too.
Bankruptcy law prevents this by treating all creditors equally. When you file, you’re saying you can’t pay everyone. The court then ensures everyone is treated the same way, based on the type of debt they owe.
Contact Kain + Henehan to Protect Your Vehicle
If you’re thinking about filing for bankruptcy, don’t make any large payments to creditors without talking to us first. We can help you understand which moves will strengthen your case and which could hurt it. We’ve helped countless people in St. Cloud successfully navigate bankruptcy, and we can help you too. You can contact Kain + Henehan by calling (612) 438-8006 or fill out the online form to discuss your situation and get the guidance you need to move forward