Bad Checks and Bankruptcy
Most debtors have a mountain of debt before filing for bankruptcy including bounced checks. Those same debtors, in an effort to avoid liens and protect secured assets such as cars, homes or business equipment will payoff the bad checks before filing for bankruptcy.
Normally this is not a problem; but if a debtor pays off a bad check during the 90 days before they file for bankruptcy the payment may be considered an “avoidable preference” by the bankruptcy court. What this means is that the bankruptcy court may feel the payment was giving preference to the secured creditor to the detriment of unsecured creditors. In this case the bankruptcy court could demand that the secured creditor return the payment to the bankruptcy estate.
There are sometimes exceptions to this rule. If a secured creditor has not released the lien on the asset until after the bad check is repaid the bankruptcy court may allow the payment. For example, if a debtor purchased a vehicle with a bounced check and the lien was released by the car dealer only after the check cleared, this may be allowed by the bankruptcy court.
If you’re a debtor with bounced checks and are considering bankruptcy speak with a bankruptcy attorney before you repay those bounced checks. If not handled properly, bounced checks made good before bankruptcy may be considered “avoidable preferences” by the bankruptcy court.