When we file bankruptcy schedules for our clients, we are required to complete a Statement of Financial Affairs. One of the questions this paperwork asks is if, within 1 year before filing for bankruptcy, the Debtor has made “a payment on a debt you owed anyone who was an insider?”
Well, to start, a Chapter 7 bankruptcy leads to the appointment of a Trustee, whose job is to determine if there are any assets of the bankruptcy estate to pay creditors. The Trustee is given certain powers by the bankruptcy code to undo certain actions of the Debtor before filing. If the Debtor makes a preferential payment to a creditor in the 90 days before filing, or a payment to an “insider” in the year before filing, the Trustee can undo the transfer, get money back, and use it to pay creditors (after taking fees for himself/herself).
For individual debtors, an “insider” includes a relative of the debtor. A “relative” is defined as someone related within the third degree.
So that includes:
parents, children, siblings, grandchildren, nieces and nephews, great-grandchildren, great-uncles and great-aunts, grandparents, aunts and uncles, great-grandparents, grandnieces and grandnephews, (first) cousins.
So, if any of those family members have loaned you money, and you repay any portion within a year of filing, this could cause complications. The magic numbers to consider: Any repayments totaling more than $600 in consumer cases or $6,825 in non-consumer cases.
A preference is a transfer of the debtor’s property to or for the benefit of a creditor for or on account of an antecedent debt owed by the debtor before the transfer made while the debtor was insolvent, made on or within 90 days before the date of filing (or between ninety days and one year before the date of the filing of the petition, if such creditor at the time of the transfer was an insider) that entitles the creditor to receive more than what they would have received in a liquidation if the transfer never happened.
That’s a lot to unpack, but it basically means, subject to some exceptions, that you don’t want to repay mom and dad from your tax refund money just before filing a bankruptcy, or else the trustee could demand turnover of that repaid money from mom. We know that borrowing and repaying family is common, and there is nothing illegal or wrong about it. It’s good to keep your family happy and avoid bad family dynamics!
But a Chapter 7 Trustee could interfere with these dynamics, and if you file a Chapter 13 case, it means that you’ll have to repay creditors what they would have received through the Chapter 7 analysis we just discussed. We’ve recently encountered several of these situations. For instance:
– A Chapter 13 client sold a vehicle and gave the sales proceeds to his son. He agreed to repay the money over the life of his Chapter 13 plan, and, assuming that happens, nobody will bother his son.
– A Chapter 7 client repaid a family member several thousands of dollars on a loan in the last year. We elected to wait for a while to file her bankruptcy to reduce the amount repaid in the year before filing to minimize the exposure to the family member.
There are ways to address these risks and to reduce the chances that the family member you’ve repaid will have to deal with your bankruptcy trustee. The best thing you can do is to fully disclose any of these situations during your bankruptcy consultation and workup meetings and speak with one of our trained bankruptcy attorneys. Schedule a free consultation today.