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Can You Repay Some of Your Debt Before Declaring Yourself Bankrupt?

April 26, 2012 | Comments: 0 | Views: 209

We consider what would happen if you pay off some of your debts preferentially to others before you declare yourself bankrupt.

If you know you are no longer in a position to repay all of your debt but you then chose to use what money or assets you do have to repay some of your debts before others, this is called making a preferential payment.

Perhaps you had some savings money which you used to repay debts or sold an asset such as your car and used this money to repay debt.

Generally speaking you are not allowed to make preferential payments to any of your creditors before you declare yourself bankrupt. Instead the money you have should be kept and given to the official receiver so that it can be shared out fairly across all of your creditors.

If you do make a preferential payment then it could be possible that after you are declared bankrupt, the official receiver will reclaim this money from the person you paid it to.

However whether or not a payment to one of your creditors would always been seen as a preferential payment is not always straight forward.

Payments to family members

One of the most common forms of preferential payment is to family members.

If you have borrowed money from friends and family you will normally feel a strong obligation to repay this as if you do not the family member may be left in a difficult position financially.

However paying back a loan from a family member and then declaring yourself bankrupt is seen as a preferential payment.

As such the official receiver could approach the person you have paid and demand that the money you have paid them is returned. If the money has already been spent the official received could start legal action against that person to recover the money.

In the same way if you are used to repaying a loan from a family member on a monthly basis, you will not be able to formally continue to make these payments. Certainly provision for them will not be allowed in your monthly bankruptcy living expenses.

Recently consolidated debts

If you have recently paid off or consolidated some of your debts with a consolidation loan and then decide to declare yourself bankrupt, it is unlikely that this will be viewed as you having made preferential payments in terms of the debts you repaid.

As long as you were honest with the consolidation loan lender about the reason for the loan they agreed to lend to you, then you cannot then be blamed for their poor lending decision.

Under these circumstances the official receiver will not normally look to reclaim the monies repaid and simply look to repay the consolidation loan lender out of any funds in your bankruptcy estate.

Contractual repayments

It may be the case that you have maintained your minimum monthly payments to your creditors right up until just before you declare yourself bankrupt.

Perhaps you have maintained your credit card payments simply by borrowing from one creditor to pay another.

In these circumstances you will not be seen as having made preferential payments and the OR will not look to reclaim any of the funds you have paid.

Having said that, generally speaking if you decide that you are going to declare yourself bankrupt you should not continue to pay any of your creditors. This ensures that you do not treat any preferentially.

In fact you should normally stop making any further contractual repayments and instead use the funds saved to pay for your bankruptcy court fee.

Preferential payment timeframes

A commonly asked question is how long ago would a payment to a creditor have had to have happened before it would no longer be classed as preferential if you then declare yourself bankrupt?

If you made the payment at a time when you were not insolvent then it will not considered preferential.

However if the payment was made when you were already struggling to repay your debts then it could be considered preferential and therefore be open to being reclaimed by the official receiver.

If it was clear that you made the payment with the intention of improving the position of the creditor you paid at the cost of your other creditors then this would definitely be seen as preferential.

However even if you made a payment without the intention to make the position of the others worse but you were insolvent at the time of the payment, then it would still be considered preferential and the money could still be clawed back by the official receiver.

Clearly this is a complex area. As such, if you are struggling to repay your debt and believe you may consider bankruptcy in the future you should not use your assets to repay any of your debts without first taking expert bankruptcy advice.

What to do next

If you are struggling with debt and are considering bankruptcy, visit

Our experts are available to speak to you about the bankruptcy option and offer further help and advice.

Our vibrant online debt forum gives free access to experienced industry experts and others who have suffered with debt problems and have been through the bankruptcy process themselves.

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.

James Falla is an expert debt advisor from For more quality and confidential information on Bankruptcy, visit

Source: EzineArticles
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