Paying Family Members Back Before a Bankruptcy
By Nicholas Ortiz, Boston Bankruptcy Attorney on Apr 11, 2008 in General Bankruptcy Information
When a person is in financial trouble, it’s natural to look to family members for support. It’s also natural to want to pay back family members and not other creditors (like credit card creditors) before a bankruptcy. However, this is a bad idea and a classic pitfall for people planning a bankruptcy.
This is because thee bankruptcy system attempts to treat all creditors with the same type of debt (for example, general unsecured debts) similarly in a bankruptcy–and in the period of insolvency leading up to it. Therefore, when a certain creditor does better than others before a bankruptcy the trustee can in some circumstances demand and sue, if necessary, the favored creditor to get back the money so that it can be evenly distributed to similar creditors. This is called avoiding a preference.
The “look-back” period for non-insider creditors is 90 days, but for family members and certain other affiliated creditors the look-back is one year. The best approach before a bankruptcy is not to pay back any money to family members and to wait until after your bankruptcy to repay these debts if desired.
Although a discharged debt is not legally owed, the Bankruptcy Code specifically allows for voluntary repayment of any debt despite discharge. Although people repaying family members before a bankruptcy are trying to help them, they are unwittingly making them targets of a trustee’s preference avoidance powers.
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