Understanding the 90-Day Rule in Chapter 7 Bankruptcy: Preferential Payments Explained
Chapter 7 erases all your debts, giving you a fresh start. But in the days leading up to your bankruptcy filing, you may have made a few bill payments, and some may be substantial. The 90-day rule is designed to ensure that any recent payments you made don't put your other creditors at a disadvantage, but what does that mean for you?
The Craig Black Law Firm understands that bankruptcy filings can be complex, with plenty of small details to iron out. If you have questions, I'm here to answer them personally. Give me a call at 678-888-1778 or fill out this confidential contact form, and I'll reach out to you soon.
What Is the 90-Day Rule?
When you file for Chapter 7 bankruptcy, all your creditors are notified that they must stop collections efforts. For those creditors, your bankruptcy filing also means the debt you owe them will probably be discharged.
However, 90 days prior to filing, you might have made payments to some creditors and not others. If those payments were substantial, it could seem unfair to all the creditors who can no longer collect. That's where the 90-day rule, also known as the preferential payment rule, can help. Your bankruptcy trustee will review payments made in the 90 days leading up to filing to see if any might be considered a preferential transfer, which means that it gives the appearance of showing preference for one creditor over another. If so, the funds may be taken and distributed to other creditors.
What Qualifies as a Preferential Transfer?
When you file for Chapter 7 bankruptcy, you'll be assigned a trustee, and one of that trustee's responsibilities is to review all payments made in the months leading up to filing. The trustee will use five elements to determine whether a transfer qualifies for the 90-day rule:
- Were the funds to the benefit of the creditor?
- Did the transfer relate to a debt that was owed before the transfer?
- Was the transfer made while the debtor was insolvent?
- Was the transfer made within 90 days of the Chapter 7 filing? Or, if the transfer was made to an insider (see below), was it made within one year before the filing?
- Was the amount of the transfer greater than it would have been if the creditor had paid after the filing?
An insider is defined as someone who was personally connected to you, the debtor. In other words, if you transferred the money to a relative or friend, even if it was a legitimate purchase, it could be seen as preferential treatment.
How the Craig Black Law Firm Can Help
The 90-day rule leaves things up to the trustee's discretion, which can make it tough to predict in advance. However, at the Craig Black Law Firm, we've seen how the 90-day rule is typically applied. If you have questions about the 90-day rule in bankruptcy, give me a call at 678-888-1778 or fill out this form.