Chapter 13 Preference payment question

[cz3ch]

I filed my original case on 9/28/12. Two months prior I received a letter from a collection agency stating if I don't pay them I'll be referred to a lawyer for possible lawsuit. This was before I even thought about filing, in fact it's what triggered my motivation to file Bk. I ended up paying the creditor to get them off my back.

This was not an insider (family, friend, etc) but a creditor. Is this considered preference payment and if so how do I deal with it.

[HHM]

1. Yes, it sounds like a preference...you made a payment to a creditor within 90 days of filing for a debt that existed prior to when you made a payment (an antecedent debt).

2. Dealing with it is more tricky in chapter 13.

The chapter 13 trustee is not going to recover it, that is not their job (they have power to do it, but the code does not impose on them to duty to do so or provide an incentive). They are going to require you to reconcile it in you plan (part of liquidation value). So, if the payment was $6,000, you will have to pay $6,000 more into the plan than you otherwise would have. Now, what I don't recall is whether you (the debtor) have standing to recover the payment for the benefit of the bankruptcy estate. I don't think you can, but I am not 100% sure.

[cz3ch]

1. Yes, it sounds like a preference...you made a payment to a creditor within 90 days of filing for a debt that existed prior to when you made a payment (an antecedent debt).

2. Dealing with it is more tricky in chapter 13.

The chapter 13 trustee is not going to recover it, that is not their job (they power to do it, but the code does not impose on them to duty to do so or provide an incentive). They are going to require you to reconcile it in you plan (part of liquidation value). So, if the payment was $6,000, you will have to pay $6,000 more into the plan than you otherwise would have. Now, what I don't recall is whether you (the debtor) have standing to recover the payment for the benefit of the bankruptcy estate. I don't think you can, but I am not 100% sure.

The payment totalled $844 split in two payments two months before I filed. I did a google search for preferential payments and saw all sorts of horror stories about fraud and going to jail. That's the reason why I asked this. I'm scared enough as it is since bankruptcy filing is a pretty big deal. I just want everything to be on the up and up and to disclose everything.

Most of all I do not want to get in trouble for doing what I thought at the time (pre-bankruptcy education) was the right thing.

[cz3ch]

I just heard from my lawyer, she said if the trustee thinks it's a preference he will sit it aside. But she doesn't believe that it was a preference. I'm letting her handle this one. I have a meeting with her next week to fix a bunch of mistakes in my original filing and will revisit this topic with her then. If she doesn't seem worried then I'm not going to worry I guess.

[HHM]

Don't worry about fraud or anything like that. Not on these facts.

I'd be surprised if a chapter 13 trustee moved to set it aside, they normally don't. Chapter 7 trustees definitely will.

Given the amount it is not that big a deal, even if you must reconcile, that is only an additional $14.06 per month. That is why your attorney is not worried about it, because no matter how it "actually" plays out, the preference issue doesn't really affect anything.

[cz3ch]

Don't worry about fraud or anything like that. Not on these facts.

I'd be surprised if a chapter 13 trustee moved to set it aside, they normally don't. Chapter 7 trustees definitely will.

Given the amount it is not that big a deal, even if you must reconcile, that is only an additional $14.06 per month. That is why your attorney is not worried about it, because no matter how it "actually" plays out, the preference issue doesn't really affect anything.

Thanks for your quick response. What does "set aside" mean btw? Ok I'll put down my guns and try to relax. You're right about the attorney not worrying. If she had something to worry about she would have brought it to my attention. Learning about bankruptcy has been highly educational but trust me it's super stressful at the same time.

Thanks again!

[angel7821]

I wouldn't worry too much about it cz3ch. I made a preferential payment of 600.00 to pay off one creditor within 90 days of filing. The trustee never brought it up at the 341 and I only have 6 payments to go until my plan is finished. I have not heard one word about it so I think you are going to be ok.

[cz3ch]

I wouldn't worry too much about it cz3ch. I made a preferential payment of 600.00 to pay off one creditor within 90 days of filing. The trustee never brought it up at the 341 and I only have 6 payments to go until my plan is finished. I have not heard one word about it so I think you are going to be ok.

That's kind of what I'm thinking now. The lawyer says at worse they can set it aside (whatever that means) and reconcile it in my filing which would be a minimal increase in my monthly payment. I've read that Chapter 13 is less punitive and the Trustee ultimately is trying to make sure that I land on both feet to be able to repay my debt. Thanks for sharing!

[walkthaplank]

Where it would be a real issue is if you repaid an unsecured loan to a relative or a friend in favor of other unsecured creditors. That you payed a non-relative creditor threatening you with a lawsuit, while technically preferential, won't likely be held against you in your plan.

In reality, your issues with your filing should have been addressed before you filed. You should have all agreed on the numbers when you signed the paperwork prior to filing, your attorney also should have explained their reasoning for their expense numbers to your satisfaction. I'm sorry your attorney didn't do this. I wouldn't worry about any "fraud" being a problem with your filing, but the more you change things after the fact, the more a trustee is going to be looking at your case as you are making yourself look fishy. Just explain that you had so much going on and you were so frazzled that you missed stuff. When somebody does this long enough they get a sense of who is hiding what, they aren't looking so much at the scatter brain as they are the guy who is hiding overtime pay, bonuses and assets.

Don't be fooled, a CH13 trustee doesn't really care about you, you have somebody to do that, your attorney. They are there for one reason, they are looking to squeeze as much money out of you for your unsecured creditors as they can. The more money they bring in, the more money the trustee makes (they get a percentage) which means they really scrutinize your expenses and will fight your lawyer tooth and nail. Our trustee in our CH13 341 doubled our payment by disputing some of our expenses. In our district (yours is likely different) the 341 and confirmation happen the same day. Had we not agreed to it and our attorney not put up a good fight at confirmation our case would have been dismissed. Our attorney was useless and basically said "well the trustee says you can afford it, either agree to it or it will be dismissed". Not saying this will happen with you, but a CH13 trustee is really looking to keep you in a tight budget, the minimum allowed under the guidelines and they are going to be very hard nosed. It is up to your attorney to make sure they pad your expenses enough to get you through and allow enough that the trustee can get a little back and still have you be ok.

Good luck, ultimately you will get through it.

[cz3ch]

Where it would be a real issue is if you repaid an unsecured loan to a relative or a friend in favor of other unsecured creditors. That you payed a non-relative creditor threatening you with a lawsuit, while technically preferential, won't likely be held against you in your plan.

If it were held against me, what's the worse that could happen. Thanks for your insight btw.

In reality, your issues with your filing should have been addressed before you filed. You should have all agreed on the numbers when you signed the paperwork prior to filing, your attorney also should have explained their reasoning for their expense numbers to your satisfaction. I'm sorry your attorney didn't do this. I wouldn't worry about any "fraud" being a problem with your filing, but the more you change things after the fact, the more a trustee is going to be looking at your case as you are making yourself look fishy. Just explain that you had so much going on and you were so frazzled that you missed stuff. When somebody does this long enough they get a sense of who is hiding what, they aren't looking so much at the scatter brain as they are the guy who is hiding overtime pay, bonuses and assets.

Thanks for the reassurance. We are converting to a Chapter 13 next week so that will be my opportunity to get all the numbers right. Unfortunately my attorney rushed me through the process and I didn't take the time to review things as thoroughly as I should. I'm hoping that with the conversion to Chapter 13 I'll have the opportunity to refile all of the numbers as I believe them to be true. My lawyer assures me that all information will be corrected, so I guess I'll have to trust in that and let her do her job.

[HHM]

If it was held against you, your monthly payment would increase by a little bit, about $14.06 per month.

As for "set aside", what I mean is that the trustee will go after the creditor whom you paid, set aside the payment and get it back. It is very unlikely they will do so. So, worst case scenario, your monthly payment would be a little higher than it is now.

[cz3ch]

If it was held against you, your monthly payment would increase by a little bit, about $14.06 per month.

As for "set aside", what I mean is that the trustee will go after the creditor whom you paid, set aside the payment and get it back. It is very unlikely they will do so. So, worst case scenario, your monthly payment would be a little higher than it is now.

Thanks for clarifying it helped to put me at ease.

[AngelinaCat]

Thanks for clarifying it helped to put me at ease.

You will also come across the term "Avoid the transfer". It is used more often than "set aside"..... at least in Chapter 7 cases.