Most of my clients arrive in my office familiar with the 90 day rule in bankruptcy. They’ve talked to friends or read on the internet. They often volunteer that they are familiar with the prohibition. Sometimes, though, they ask questions about the details of its application.
Which is all very interesting, except that there is no 90 day rule that makes any difference to debtors. Some think the rule is one prohibiting paying any bills during the run up to bankruptcy. Others think it is a rule against buying anything. Some are simply unclear how it works.
So, the only rule with a 90 day scope is a rule that allows a trustee in bankruptcy to recover payments the debtor made on legitimate debts if the payments in that 90 day period gives that creditor more than the creditor would have gotten through the bankruptcy process. These payments are termed preferences.
The rule is not one that penalizes debtor conduct. There is no downside to a debtor who pays one creditors over another. The rule may operate to the prejudice of a creditor who got more than its fair share of the debtor’s assets right before the bankruptcy case was commenced. But this is a bankruptcy specific statute. California state law is explicit that a debtor may pick and choose among his creditors, paying some and not paying others. (The unpaid creditors may have remedies under state law, but those remedies don’t include making the creditors who got paid give up their payment.)
The other reality about the trustee’s right to avoid preferential payments is that small preferences are seldom pursued by Chapter 7 trustees. By statute, payments that total more than $600 in the 90 days before filing are avoidable. But it is not economic to sue creditors to recover $600. Each trustee has her own rule of thumb about when a preference can be effectively recovered to provide a dividend to creditors, but almost assuredly, the sum is well more than $600.
Image courtesy of c.k. hartman.
Cathy Moran, Esq.
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Last modified: May 7, 2011