Filing for Chapter 7 bankruptcy does not mean the financial decisions you made in the months before filing will pass unscrutinized. The bankruptcy trustee may look closely at certain payments you made to creditors during that time, which is what the 90-day rule is all about.
If you are considering Chapter 7 bankruptcy, here is what you need to know about this rule and how it could affect your case.
The 90-day rule explained
The 90-day rule generally refers to the period before you file bankruptcy during which certain payments to creditors may be reviewed as preferential transfers. Under federal bankruptcy law, a payment may be considered preferential when it allows one creditor to receive more than they would have received if the payment had not been made and your assets had instead been distributed through the bankruptcy process.
For example, if you make a significant payment to one creditor shortly before filing Chapter 7, the trustee may determine that the creditor received more than they would in the bankruptcy proceedings. If the payment qualifies as a preference or preferential transfer, the trustee may seek to recover it for the bankruptcy estate.
It’s worth noting that not every payment made during the 90-day period will automatically be treated as a preferential transfer. Several exceptions may apply, and the outcome can depend on factors such as the type of payment, who received it, the amount involved and the circumstances of the transaction.
The rules also change when you pay an insider, such as certain family members. The trustee can generally look back up to one year before your bankruptcy filing when reviewing certain payments made to insiders.
Does the 90-day rule prevent you from filing?
The 90-day rule is not a waiting period. It only gives the trustee a basis to examine certain transactions made before your filing. This underscores the importance of disclosing your financial activity accurately when preparing your bankruptcy petition.
It’s also in your best interests to consider getting professional legal guidance before making significant payments or transfers as you prepare to file. That way, you can better understand how those transactions may affect your bankruptcy case and whether any potential issues need to be addressed before you file.