Bankruptcy Questions Answered

Employee’s Dilemma: Is Paying Employer Back Money In Order To Be Rehired An Improper Creditor Preference?

A Chapter 7 trustee can reverse and bring back into the bankruptcy estate any payments the debtor makes to an unsecured creditor within 90 days of filing bankruptcy; such payments are considered preferential to one creditor at the expense of all other creditors.

A prospective Chapter 7 client told me today that his employer fired him in October, 2009, and gave him a $15,000 severance payment. The severance had one condition: if the employee was recalled to work and accepted a position with the same employer within a year then the severance payment was owed back to the employer. The client never spent the severance. He held it in a separate bank account. This past month he received an offer to return to his old job which he accepted. As a condition of re-employment, he owes the full $15,000 to the employer.

Here his the man’s dilemma. He as accumulated too much unsecured debt to repay and needs to file bankruptcy to have enough money to save his house. Unsecured creditors have already filed lawsuits. If he files without repaying his employer the bankruptcy trustee will claim the $15,000 sitting in his bank account. His employer may fire him again because he did not repay the money. If he now pays the employer the $15,000 owed the bankruptcy trustee could claim the money from the employer as a bankruptcy preference. Same problem; if the employer does not keep the repayment he may try to file the debtor for breach of their agreement.

If he can wait 90 days to file bankruptcy he may be in the clear. If he cannot wait 90 days II advised the man to repay the employer now. I think he has good arguments that the $15,000 payment to his employer is not a preference. He could argue either that the money is not an existing debt until he starts work, or that repayment is in the nature of a cost of obtaining his job, or that he never had unconditional ownership of the money until a year after he was fired. . Most importantly, he is receiving new consideration (his job back) in exchange for this repayment.

Regardless of the legal reason, I don’t see his repayment at time he gets a job as the type of "preference" bankruptcy law is trying to prevent. Waiting 90 days is best, but alternatively, repaying the employer is better than keeping the severance until the bankruptcy filing date.