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Can I pay off a debt before going bankrupt
Money Advice, Debt Advice & Debt Help

Can I pay off a debt before going bankrupt

Can I pay off a debt before going bankrupt

Preferential payments are essentially where you favour one creditor over another. If you do this and then declare yourself bankrupt the ‘favoured creditor’ may be forced to return the money to the official receiver.

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Paying family first

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. If you do not the family member may be left in a difficult position financially.

However paying back a loan from a family member would be a preferential payment if it is done just before you go bankrupt. As such the official receiver could approach the person you have paid and demand that the money you have paid them is returned.

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.

If the money has already been spent by the family member, the official receiver could start legal action against them to recover the money.

When is a payment not Preferential

A key question is how much time has to pass before a payment can be considered ‘not preferential’. This can be complicated and you should always take advice before taking any action.

A payment made 2 or more years before you go bankrupt will not be considered preferential. If you can prove you were ‘solvent’ at the time, payments made less than 2 years ago may also be acceptable.

However if you were already struggling to repay your debts, then the official receiver will look to reclaim the payment. This is particularly the case if your intention was for one creditor to benefit at the cost of the others. Even if it was not intentional, the payment would still be deemed preferential and be clawed back.

This can be very stressful if the favoured creditor is either a friend or family member. We can talk you through your options and avoid unnecessary stress.

Consolidating debts before Bankruptcy

You may have consolidated some of your debts with a loan and then decided 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.

It is important that you were honest with the consolidation loan lender about the reason for the loan. If so, then they agreed to lend to you, so you cannot then be blamed for their poor lending decision.

The official receiver will normally just repay the consolidation loan lender out of any funds in your bankruptcy estate.

Are contractual repayments preferential

Before declaring bankruptcy you may have paid some creditors the normal payments, but not others. Perhaps you have maintained your credit card payments simply by borrowing from one creditor to pay another.

This would not be seen as preferential payments and the OR will not look to reclaim any of the funds you have paid.

In preparation for Bankruptcy it is better to stop paying your creditors. That way you will not be paying any preferentially. This also means that you can start to save any surplus money you have to pay for your Bankruptcy court fee.

Do you have family debts? Are you considering Bankruptcy? Contact us to discuss your options (0800 077 6180). Preferential payments will be clawed back by your creditors.

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2 thoughts on “Can I pay off a debt before going bankrupt

  1. Steve says:

    Can you advise?

    I borrowed £10950 off of my daughter too pay off some of my existing debts which I did. She borrowed the money from her bank. I borrowed money from my bank to pay back the loan she took on my behalf.

    Now the official receiver has written to her saying she is liable for the money she leant me even though the money was only ever used to pay off debts.

    I am bankrupt but now I feel guilty about my daughter’s situation. Is there any advice you can give me. She hasn’t the money too pay and I don’t either as I have an IPA plan.

    1. Hi Steve

      The problem here is that by repaying the money you borrowed from your daughter you made what is know as a preferential payment. Given this happened within 2 years of the date of your bankruptcy the official receiver is within their rights to demand the repayment of the money from her. The reason why she lent you the money is irrelevant even if she got into debt herself to do so.

      If your daughter is unable to pay back the money the OR can take legal action against her. If this happens her only option would be to consider starting a debt solution to protect herself.

      If she is not a home owner and is on a low income one option she could consider is a Debt Relief Order which costs just £90 and would mean the debt would be written off.

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