Preferential payments?

specialkay60

Hi all
thinking of doing DRO but was wondering what counts as a preferential payment? this is because i had to claim on pet insurance for our cat and my son paid vet's bill until claim settled when i paid him back, would this count as a preferential payment? look forward to anyone's advice on this!
thanks
Sharon

alltaken

debt_doctor wrote: »

Preference: A payment, other than in the ordinary course of business, with a view to improving that creditors position if you were to become bankrupt.


So for a preference to be proven you must have made a payment that was not part of the original agreement AND you must have done it to protect that creditor in bankruptcy.

DD

I'm not sure if what you did was to improve your sons position come bankruptcy but to me it seems like essential expenditure.

wba31

Insolvency Service expect all creditors, including friends and family, to be treated the same, so it would technically be classed as a preferential payment.

HOWEVER it's not as black and white as saying that you now should not apply for a DRO. How long ago did this payment occur? how much was paid back? what was the total level of debt? if it is deemed that what was paid was not detrimental to your creditors the DRO will still be approved.

Johnsmith2016

How much was it? Lets say 3k

As long as you can prove your son paid the vet bill (bank statment)
And you then got a payout from insurance of 3k then paid it to your son then it should all match up.
I wouldnt think this would be a problem personally, despite the technicality .

wba31

Johnsmith2016 wrote: »

How much was it? Lets say 3k

As long as you can prove your son paid the vet bill (bank statment)
And you then got a payout from insurance of 3k then paid it to your son then it should all match up.
I wouldnt think this would be a problem personally, despite the technicality .

The Insolvency Service would argue that if the hypothetical figure of £3k was received from the insurance, this should have been split pro-rata between all creditors (inclusive of the son) and the rest of the debt listed in the DRO. However the way the payment has been paid, the son gets to recoup all monies but the creditors are to go empty handed? Although common sense would argue that in theory nothing untoward as occurred, the fact remains that the OP had £3K (hypothetical) in hand and chose to settle with their son and not their other creditors.

But that's not to say a DRO will not be approved. if the amount was £500, and the debt total £19000, the £500 would not affect the overall debt total too much.
If it was £3k (as per your example) and the remaining debt total £6k, then the payment was at a severe detriment to the other creditors.

alltaken

You're arguing semantics that don't apply. Here's the key part:

.....you must have done it to protect that creditor in bankruptcy

Did you know you were likely insolvent when that payment to your son was made? If not, you would not be making other creditors weaker by way of protecting your Son (another creditor for all intents and purposes).

I could be wrong but that's my interpretation.

fatbelly

This is from the DRO toolkit - make of it what you will

What is a preference?

A preference is where a client does something or allows something to be done, which will put a creditor or a guarantor for a debt in a better position following the making of a DRO, than they would otherwise have been in. For example, if your client pays off one creditor but not the others, the client has given that creditor a preference. The debt in question must be a qualifying debt. Payments towards both non priority and priority debts such as council tax, rent arrears and utilities can technically be preferences. However, the DRO Team has said that payments to priority creditors will not be treated as preferential payments

If a third party, such as a relative or friend, uses their own money to pay off one of the creditors for your client, but not the others, the DRO Team has said that it does not consider this to be a preference.

Effect on your client's application for a DRO

If a transaction at an undervalue or preference has taken place within the past two years, the DRO Team has the discretion to refuse to make a DRO. The DRO Team will look at the individual facts surrounding each case before making the decision and will consider factors such as:-
•what was the effect of the transaction at an undervalue or preference on the other creditors? For example, how much money was involved, compared to the total amount of debt
•when within the two year period did the transaction at an undervalue or preference take place? For example, was it made after the client received advice about a DRO
•who was the transaction with or preference given to? For example, was it a friend or relative or was it a commercial creditor
•why did it happen? For example was the client pressurised into making the transaction at an undervalue or preference.

Questions about preferences

•Was the client insolvent at the time the payments were made?
•Why did the client make the payments?
•Who were did the payments made to?
•When were the payments made?
•How much were they?
•Was there any agreement drawn up in relation to the payments?
•Why didn’t the client use the money to pay all their creditors on a pro rata basis?
•Was there any creditor pressure?
•If a preference has been made to an associate, for example a relative, is there any documentary evidence that the money repaid, was in fact owed?
•How did the client obtain the funds to make the payments?

specialkay60

sorry but am still confused by answers! vet bill was £190, my son paid this and then i paid him back when pet insurance paid out, hope this clarifies situation?

DorisTrousers

If it were me, I would interpret this as the vet being the creditor. That debt was paid by 3rd party funds, and the insurance payout went to the 3rd party.

It is still, technically, a preference but under the circumstances, and providing the DRO Unit was e mailed in advance with what has happened, I would be confident that there would be no issues with it.

National_Debtline

Hi specialkay60


It is all, as Doris suggests, a matter of interpretation. Had the insurance paid out more quickly, you could have potentially passed the funds straight on to the vet without your son having to get involved, and it would all be that little bit tidier. Had the vet carried out their work already by this point, or were they withholding their services until payment was made? Was the vet not willing to wait for the insurance claim to be processed?


Either way, the fact that the sum involved @£190 is relatively small is a good thing from your perspective. The larger the payment, the greater the risk of its being seen as a preference to the detriment of other creditors.


Ultimately, though, it's not my interpretation that matters, it's that of the Insolvency Service.


The payment in question doesn't prevent you from seeking a DRO, and the intermediary setting it up can't refuse to submit the application if you otherwise meet the criteria and insist on it. They should, however, warn you of the potential risk that the Insolvency Service will revoke the DRO if they decide that a preference has been shown to a creditor.


While no two cases are alike, I can say that we have submitted DRO applications in the past where potential preferences have been highlighted and these applications have gone through OK.


Dennis
@natdebtline

mwarby

Worth bearing in mind that had the vet work not been done (creating the debt), there would be no insurance payout. Its not likely you could have secured the payout and distributed the money to all creditors.

This is somewhat different to winning to most other windfalls(like winning money) and choosing to repay your friends then going DRO on commercial creditors. It's also different from the realizing your insolvent and choosing to stop paying creditors but repaying your mates/family instead

I'm of a similar opinion to other posters, I don't see it being a big issue due to intent and value