Do you think you need to pay just one more bill before filing bankruptcy? If you were going to pay just one more bill before seeing your bankruptcy attorney in Lorain county what would it be for? Normally following the 90% rule, (possession is nine tenths of the law) clients will pay money owed to a relative. Typically it comes from a tax refund before even meeting with the bankruptcy attorney. Recently I had the most bizarre pre-bankruptcy bill payment question. The client owed over a thousand dollars to a pay day loan operation. He wanted to pay them off before the bankruptcy. Why? Because the girl working there was so nice! No matter that he was paying over 300% annual interest. I have news for you. They didn’t give you the money to be your friend, or because they are a friend. They are in business. They are charging loan shark rates. You are being raped. No smile, no kiss. Just $120.00 a week interest.
What is so bad about paying a bill to anyone before you file bankruptcy? Two things really:
1. It is a preference payment, or
2. It is a fraudulent conveyance payment, or
3. Both of the above.
It is important that you understand both of these terms if you want to file bankruptcy. A preference payment happens when you prefer one bill over another. Like if you pay $1,000 to a payday lender and nothing to everyone else you owe money. The law in Ohio and in most other states is that it is not your job to decide who gets what. All creditors in a class must be treated the same. If one gets a grand, then everyone gets a grand. Put another way, if one gets $0.00 then they all should get $0.00.
A fraudulent conveyance payment is when you pay money to some insider ahead of other creditors. Who is an insider?
1. A relative, Mom, and grandma are two favorites.
2. A business associate
3. A close friend
Ohio law figures that anytime you pay money to one of these people ahead of other creditors the act of payment is a fraud on everyone else you owe money to. In bankruptcy court you only have to report these payments going back a year. Ohio law can reach back 4 years.
If you make a preference payment or a fraudulent payment the chapter 7 trustee can reach out, reverse the payment and recover the money for the benefit of all your creditors. Basically they will call your mom hand make her return the money you paid her. Bet you can’t wait to explain that one! The moral of this story is that you must avoid preferential payments and fraudulent conveyances. Show mama you love her and pay her later. If you feel you must waste that thousand dollars, at least split it evenly among everyone you owe.