When meeting with folks to discuss solutions to their debt woes, a popular question often pops up: “Should I be paying creditors on the eve of bankruptcy?” These payments are called preferential payments.
On the surface it seems like an honest inquiry and a harmless one at that. Some people might even wonder why anyone that is planning to make an assignment in bankruptcy or file a consumer proposal would even consider making payments to their creditors.
Honest People, Just Looking to do Right
Coming to the conclusion that a bankruptcy or a proposal is necessary to deal with debt is a tough conclusion on its own. People generally are good natured and want to make best efforts, including one final payment to their creditors. Sometimes making this “final” payment offers the payor some ease on their conscience. But if we are being honest, the payment is unecessary and might even create more bad than good. It is better to keep your resources, use the extra money to start the insolvency proceeding, stock your fridge and catch up on overdue utilities.
Still Have Someone You Want to Pay?
Okay, so your fridge is full and utilities are up to date and you still have someone in mind that you would like to pay. Perhaps a family member or friend or a debt where your spouse is a co-borrower. Maybe even a small credit card with the banking institution that handles your chequing account.
The recommendation, at least from this writer, is that you refrain from making those payments. One of the core philosophies of the Bankruptcy and Insolvency Act is that all creditors get treated equally and share in a pro-rate distribution of the bankrupt’s assets. Any arrangement otherwise creates potential preferential payments.
Preferential Payments? Tell Me More!
A preferential payment is pretty much self explanatory. You are preferring one or some of your creditors over the rest of your creditors. Usually the preference is made in favour of someone that you know or are related to; a creditor where the payment benefits a third party, like a co-borrower of one of your debt obligations; or a product with your banking institution so that you don’t need to open a new account.
And if I Make Some Preferential Payments?
Well to put it blunt, there are mechanisms under the Bankruptcy and Insolvency Act to fix those transactions and a duty, where economically reasonable, for your Licensed Insolvency Trustee to avail themselves of these mechanisms. In situations where it is impracticable for your Licensed Insolvency Trustee to take steps, any of your creditors can take it upon themselves to seek a remedy.
These remedies may include, and are not limited to, seeking payment from the party that was the beneficiary of preferential payments or asking the Bankruptcy Court to grant a discharge conditional upon you paying an additional amount into your bankruptcy before being discharged from your bankruptcy.
Preferential payments should be avoided when the end game is a bankruptcy or a proposal under the Bankruptcy and Insolvency Act. These payments have the potential to derail a reasonably good process for getting a fresh start and could cause more grief than otherwise intended. Your best bet is to have the honest conversation with anyone that is impacted by your need to use an insolvency proceeding to get a fresh start and let them know that your Licensed Insolvency Trustee will be contacting them.
If you have more questions, please contact us at email@example.com or 519-601-9793.