The Impact of Preferential Payments
Navigating the turbulent sea of debt can be a daunting task. In this journey, one often finds themselves entangled in a web of financial terms and regulations. One of these terms is preferential payments. This article aims to shed light on this topic and guide you on the path of financial recovery.
Understanding Preferential Payments – Unraveling The Concept
In the realm of debt and insolvency, the term “preferential payment” assumes great significance. In simple words, it refers to the payment made to a specific creditor, in preference over others, usually before filing for bankruptcy or a consumer proposal. It might appear as an act of goodwill or moral responsibility, but it might land you in legal trouble.
The Scenario That Paints The Picture
Consider this: You are drowned in a sea of debt, with an outstanding balance exceeding $20,000. The debts comprise credit cards, bank loans, and business-related taxes. The incessant collection calls are causing distress, and it’s clear that you need to take control of the situation. In such a scenario, filing for bankruptcy seems like the most feasible solution.
The Dilemma of Morality and Legality
In our hypothetical case, let’s say you sold your property a year ago and used the equity to repay a friend who had financially assisted you in the past. While morally, it may seem like the right thing to do, legally, it’s a whole different ball game. This is where you need to beware of preferential payments. This act of repayment could be considered a preferential payment under the Bankruptcy and Insolvency Act (BIA), which could disadvantage your other creditors.
Transparency and Its Implications
Should you decide to file for bankruptcy or a consumer proposal, this preferential payment must be disclosed to your creditors. In the case of a consumer proposal, your creditors might accept your proposed settlement, fully aware of the preferential payment, and not pursue further action to reclaim the $100,000. However, if you opt for bankruptcy, the scenario changes. As Licensed Insolvency Trustees, we would be obligated to try and recover the payments made to your friend.
The Impact of Preferential Payments
Preferential payments could potentially prolong your journey to financial recovery. If you had filed for bankruptcy, the attempt to recover the payments might have prevented you from discharging your bankruptcy after the standard nine months.
The Light at The End of The Tunnel: Consumer Proposal
Given this predicament, the most suitable course of action would be to file a consumer proposal. This allows you to pay a reduced settlement amount over a span of five years, aligning with your budgetary restrictions. The acceptance of this proposal by your creditors would hinge on their interpretation of fairness, based on your financial status.
The Silver Lining
Filing a consumer proposal, despite paying more than a bankruptcy (prior to handling the net equity issue), offers several benefits:
- It saves you the time and money involved in legal proceedings to discharge bankruptcy.
- It spares you the discomfort of having the Insolvency Trustee approach your friends for payment recovery.
- Despite paying less than the owed amount, it provides the much-needed relief from debt.
- It offers predictability in how creditors would react to the preferential payment.
- It puts you in a better place to rebuild your financial standing.
Expert Advice at Your Fingertips
If you’re unsure about how your assets could impact your debt resolution strategies, it’s advisable to consult with trusted insolvency professionals. A free consultation could provide the clarity you need to navigate through these tough financial waters.
In conclusion, while dealing with debt pressures, it’s crucial to beware of preferential payments. It’s important to strike a balance between moral obligations and legal requirements. Remember, help is just a call away.