The short answer is “no,” but there is some good news, too. Before we jump into options you do have for paying back a friend or family member when you file bankruptcy, let’s look at the general rules for repayments leading up to a bankruptcy filing and how “insiders” are treated differently.
Bankruptcy is designed in part to make sure creditors are treated fairly. That does not always mean they get paid in full, or at all, but it does mean the bankruptcy petitioner can’t pick and choose, routing all or a disproportionate share of funds to a specific creditor and leaving the others out in the cold. That is true even if the creditor is your mom. It is fairly common to see family members financially assisting other family members. At Bond & Botes when we initially consulting with someone about their financial problems, we make a detailed inquiry to determine if a prospective client has been involved in any such transactions. It is crucial to know the details about these situations before any formal bankruptcy petition is filed.
In fact, when the creditor is a family member or business partner, the transaction gets a bit of extra scrutiny.
Creditor Preferences in Bankruptcy
To help ensure that creditors are treated fairly in bankruptcy, the bankruptcy trustee looks back at transactions in the 90 days leading up to the bankruptcy filing. Of course, the court expects that you will have made some payments during that time. What the trustee is looking for is payments that give the creditor more than they would have received in a Chapter 7 case if you had not made the payment.
For illustration, imagine that a Muscle Shoals resident pays off a creditor with a $1,000 payment one week before filing. Like most Chapter 7 cases, it is a “no asset” case. That means the unsecured creditors do not get anything. But, if that $1,000 payment had not been made, the $1,000 would have been available to pay creditors. Other creditors would have received a share of that $1,000.
Of course, this is a very simplified example. An experienced bankruptcy attorney is the best source of information about how specific payments may be treated in a Chapter 7 case. But the example illustrates the core issue: by making a lump-sum payment to one creditor, the bankruptcy filer has potentially taken money away from other creditors.
If that’s the case, the bankruptcy trustee has the option to avoid that transaction and take the money back for distribution to creditors. Most bankruptcy trustees take a very pragmatic approach to avoidance, especially where the amount that could be recovered is only a few hundred dollars. Even the $1,000 example above would probably not be bothered, but too much more and it could be a very different story. So, if the amount involved is significant, please let us at Bond & Botes know so we can best advise you how to navigate your financial situation.
Special Rules for Insiders
Family members are considered “insiders” in a bankruptcy case. For bankruptcy law purposes, a relative includes:
- Great grandparents
- Great grandchildren
- Nieces and nephews
- Aunts and uncles
This includes people in those relationships as a result of a step-relationship or adoption.
The main difference is that instead of looking back at transactions in the previous 90 days, the trustee can look back a full year. So, if your mom loaned you $5,000 to buy a car and you paid her back all at once nine months before your bankruptcy filing, the trustee may be able to reclaim those funds.
Obviously, having the bankruptcy trustee initiate an action against your mom to take back money that may be long gone is a far worse outcome than having delayed payment or made small payments over time.
Other insiders subject to the one-year lookback period include:
- A general partner of the debtor
- The relative of a general partner of the debtor
- A partnership in which the debtor is a general partner
- A corporation of which the debtor is a director, officer, or person in control
The Exception to Avoidance
The trustee’s right to avoid preferential payments made in the 90 days or one-year preceding bankruptcy is intended to prevent the debtor from picking and choosing who gets paid. So, the rule only applies if the debtor was insolvent at the time of the payment. In simple terms, “insolvent” means that the bankruptcy filer’s debt exceeded his or her assets. Without crunching the numbers, a person would not necessarily know whether he or she was legally insolvent.
Don’t assume that just because you were earning money and paying your bills at a given time, you weren’t insolvent. Again, this is something you can talk with us about and we can help you determine if you were insolvent or not.
The Good News about Debt to Friends and Family
You cannot push your friends and family to the front of the line and pay them off before bankruptcy. And you must list all of your outstanding debts in your bankruptcy petition, even if those debts are to insiders. But, in a Chapter 7 case, the bankruptcy estate includes only your assets at the time of filing. With limited exceptions (such as an inheritance), you’re free to do as you like with your income after the bankruptcy petition is filed–and that includes making payments to friends and family, even if they were listed in the bankruptcy petition.
While the automatic stay prevents creditors–even those close to you–from pursuing payment, it doesn’t prevent you from making voluntary payment of your own initiative. And, though the bankruptcy discharge eliminates your legal obligation to pay a debt, it in no way prohibits you from doing so.
The best way to protect yourself and those you may want to pay is to talk to an experienced bankruptcy attorney here with us at Bond & Botes and disclose everything. A simple mistake could be costly for you and the friend or family member you are trying to protect.
At Bond & Botes, we have been helping people legally resolve debt for decades.
Bond & Botes Helps People Struggling with Debt
If you are considering bankruptcy, the best starting point is to consult an experienced local bankruptcy attorney. You can begin gathering information right now by scheduling a free consultation with one of the experienced bankruptcy attorneys at Bond & Botes. We can answer all your questions regarding Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, stopping a foreclosure or wage garnishment, avoiding liens, stopping lawsuits, discharging medical debt, personal loans, payday loans, credit card debt, etc. We can alleviate your stress! We want to help and we can help you!
Bond, Botes, Sykstus, Tanner & McNutt, P.C.
102 South Court St, Suite 314, Florence, AL 35630
Phone: 256-760-1010 • Fax: 256-760-1023
Office Hours: Monday – Friday • 8am to 5pm
No representation is made that the quality of legal services to be performed is greater than the quality of legal services to be performed by other lawyers.