Many people faced with debts they cannot afford make every effort to resolve their debt without filing bankruptcy. In some cases, they take temporary loans from friends or family to get by until their income increases. However, in today’s difficult economy, those efforts do not always work, and the individual (or couple) turns to bankruptcy as a way to remove most or all of their debt to give them a fresh start.
Unknown to many that file bankruptcy is that the Trustee appointed to administer the case can, in certain circumstances, take back money paid to creditors prior to the bankruptcy filing date. This includes payments made to friends or family, who assisted the debtor. These payments are often classified as “preference” payments depending on who received the payment and the payment date.
The Trustee does not always use the option to recover money from creditors that the debtor paid prior to the filing. The Trustee must consider who received the payments, how much they received, and whether other creditors were paid similarly. The Trustee is more likely to utilize his/her avoidance powers when the payment to a particular creditor was for a large amount and made within the time period set forth by the bankruptcy code for preference payments.
Generally, the Trustee will not challenge payments to secured creditors (such as house loans or car loans). Similarly, minimum payments on credit cards are often left alone unless one creditor received a large amount at the expense of other creditors.
If a debtor is interested in paying back loans to friends or family, it is usually best to wait until after the bankruptcy case is over. The money that the debtor would use to make such payments prior to the bankruptcy filing will often be protected (exempt) in the bankruptcy case so that the debtor is free to use the money as he wishes after the case concludes. However, if the payment is made prior to the filing date, the money is no longer in the debtor’s possession and he cannot exempt the money in the bankruptcy. The Trustee can then recover the money from the person who was paid and redistribute the amount collected evenly among all the creditors.
It is often best to consult with an attorney prior to filing bankruptcy to assess whether any payments recently made would be at risk.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.