If someone owes criminal restitution, that debt might not be dischargeable in bankruptcy. However, if it’s paid shortly before the bankruptcy filing, it may be a preferential payment (“preference”) that the bankruptcy trustee can take back—meaning that the debtor may be stuck still having to pay it.
What is a Preference?
Bankruptcy law has two main purposes:
- First, to give debtors a fresh start, by eliminating unsupportable debt.
- Second, to pay creditors as much as is reasonably possible—and, as part and parcel of that, to treat all creditors fairly.
A preferential payment is an unfair one. It is one made that puts one creditor in a better position than he or she would have been had their debt been included in, and paid through, the bankruptcy process, to the detriment of other creditors. The official requirements to find something a preference are:
- Payment made on a pre-existing debt (instead of on a debt incurred at the time of payment)
- Payment made while the debtor is insolvent (i.e. when the debtor’s cash flow is not great enough to pay his or her obligations)
- ayment made within 90 days of filing for bankruptcy
- Payment that allows the creditor receiving it to receive more than it would have received in the absence of the preference, if the claim went through bankruptcy
If all four criteria are met, the payment may be a preferential one.
What Happens to Preferential Payments?
The bankruptcy trustee (the official on the case) can avoid preferential payments. This means the trustee can force the recipient to pay it back. The money will go into the bankruptcy estate, into the pool used to pay all creditors.
Criminal Restitution is a Debt, and Therefore Subject to Preference Rules
When most people think of a “debt,” then think of a loan, a balance on a credit card, a promissory note, etc. However, any obligation to pay another is a debt, even when that obligation is imposed by law, not accepted by choice. So if you are sued for having run someone over and are found liable to the injured plaintiff, the money you owe him or her is a debt. Similarly, money someone is ordered to pay as restitution for having committed a crime is also a debt. As a debt, it is subject to the preference rules.
Between a Rock and a Hard Place
However, many criminal restitution debts are not dischargeable in bankruptcy. That means that bankruptcy will not eliminate them, and the debtor will still owe them. This in turn means that if the trustee avoids a restitution payment made shortly before the bankruptcy, the debtor may still owe that money, even during and after bankruptcy.
How an Attorney Can Help
Bankruptcy law generally is complex; the law regarding to preferences is particularly so. If you were paid money by a debtor that the trustee is trying to take back, or if you paid money out and don’t want it to be recovered, you need a lawyer to help you fight the characterization of that money as a recoverable preference.
