Outside the context of bankruptcy, this is a very strange notion: don’t pay Mom or Dad back – file bankruptcy first. But this has some very real world consequences. I usually see an uptick in people paying back their relatives around tax season, when people get their tax refunds. But this could prove potentially disastrous if you are planning on filing a bankruptcy.
Why is this? Well, it all comes down to preference payments to an “insider.” An insider can be a friend, relative, or even business associates in some situations. And the bankruptcy code does not necessarily look kindly on repayment to these folks within a year of a person filing bankruptcy. The bankruptcy code, in all fairness, tries to even the playing field for all creditors.
For example, if you pay Mom and Dad back during the past year, especially at the expense of other creditors, these payments can be “clawed back” by the bankruptcy trustee, or the person who administers your bankruptcy. These payments usually need to be substantial enough for the trustee to pursue; usually repayment of debt to family members that are minimal do not raise the trustee’s eyebrow. However, the more money you repay a family member or friend, within a year of your bankruptcy, the more exposure you create: the trustee can go after that family member or friend to recover the monies you paid, as a preference payment – and the trustee has every right to pursue these payments under the law.
So, if you have been paying Mom or Dad on a debt and you are considering bankruptcy, what do you do? Immediately make an appointment to see a bankruptcy attorney – such as myself. Second, stop paying the family member immediately to mitigate any exposure. After your bankruptcy, you can repay anyone you want to, including friends or family. The issue is when you pay friends or family back before you file bankruptcy.*
In certain circumstances, when a client comes to see me and I learn that a substantial amount was paid back to a parent or relative within the last several months, there are a few things we can do. First, we can undue the transaction – have the parent or relative return the funds (check form is usually best for record-keeping). Or, wait a full year for the preference period to run (the bankruptcy code only allows a 1 year look-back; therefore if you paid Mom $5,000 on a debt 13 months ago, this does not fall within the 1 year period in which the bankruptcy trustee can claw back the payment as a transfer to an “insider”).
In any event, you should meet with a bankruptcy attorney immediately and discuss what options are available.
I conveniently offer free in-office consultations in Eugene or by phone. Please feel free to contact me today to schedule your free bankruptcy appointment to learn how bankruptcy may benefit your financial situation. And if you have been paying back an “insider” during the past year, we can discuss ways to mitigate any consequences.
I look forward to hearing from you.
* If Mom or Dad hold a security interest in a vehicle, and you are making normal payments on this vehicle to Mom and Dad – this is not a preference payment. Most preference payments apply to unsecured debt, or debt not attached to collateral.