A “preferential payment” is a payment that you make to a creditor that is in preference to your other creditors, meaning that you have given them substantially more than you have given the others. If you manage to pay all of your debts, a payment like this should not matter, however, if you were to go Bankrupt, though, or enter into a formal arrangement with your creditors known as a Personal Insolvency Agreement, any preferential payments would need to be investigated by your Trustee.

When you fill out the paperwork to declare yourself Bankrupt, you are asked to disclose if you have paid any creditor an amount more than $1,000 over and above your normal repayments, or surrendered any assets to them. Your Trustee in Bankruptcy must then review the last six months worth of bank statements for all bank accounts that you hold. From these they will be able to see if you have made any large payments to any creditors. They will then determine whether you were insolvent at the time, and if so, whether the creditor that received the large payment got more than they would have had you gone bankrupt and your available funds were spread out evenly amongst everyone. If so, the Trustee may then seek a court order to have that transaction reversed and the money would be distributed fairly to all creditors.

If you were to lodge a Personal Insolvency Agreement proposal your appointed Controlling Trustee would not “claw back” any of those payments like they would in a Bankruptcy. They do have to know about them though, because it is their job to recommend your offer to your creditors. To do this they need to determine what would happen if you were to declare Bankruptcy and compare this with your offer under the Personal Insolvency Agreement. The Controlling Trustee then sends a detailed report out to your creditors showing them that they would get more of their money back if they accepted your offer instead of making you go Bankrupt.

If you have any creditors demanding that you pay them more than your regular repayments, call our debt advice line on 1800 462 767. We can explain the terminology to you and give you advice on your options to deal with your unmanageable debt.