Can I pay back a relative, and then file a bankruptcy case?

As an Asheville bankruptcy lawyer, I speak with people every day who are trying to find creative ways to make ends meet.  A common strategy, when folks suffer financial strain, is to borrow money from a loved one.  Before paying back friends or family, consider the effects it may have on your bankruptcy case.

Before paying a relative, consult an attorney

What is a preferential payment?

There is a fairness theory in bankruptcy that all creditors should be treated equally.  If you have some credit card debt, and have borrowed money from family members, both are considered general unsecured creditors should you decide to file for bankruptcy.  When you pay back one creditor more than another, the trustee has a right to cancel the payment you have already made, get the money back, and distribute it equally to all creditors in the same class (general unsecured).

Types of Preferential Payments

Payments to insiders, family members and business associates mainly, can be cancelled by a trustee if made within 1 year of filing a bankruptcy case.  Payments to regular creditors (credit card companies, medical service providers) can be cancelled by a trustee if made within 90 days of filing a bankruptcy case.

Solutions

For regular creditors, most clients do not care if the trustee gets the money back.  Who cares whether Visa or Mastercard gets the money I paid back a couple months ago?  However, we care more about family members.  My strong advice is to wait on making payments to family members until the day after you file a bankruptcy case.  You can usually pay back as much as you want the day after we file your case.  If you have already made the payment, it would be wise to consider waiting until after a year has expired or potentially negotiating with the trustee to resolve the issue.

Are you struggling financially?  If so, get professional advice as early as you can.  For those of you in Western North Carolina and Asheville, I would be pleased to speak with you during a free, initial bankruptcy consulation.

*The information contained on this website is not intended and does not constitute the providing of any legal advice or any legal opinions or services to any user thereof. The information available on or through this web page is not intended and shall not be used as a substitute for the advice and consultation provided by an attorney.  Any factual examples used to illustrate concepts are hypothetical and do not depict actual events or real persons.