Paid a Relative Money Recently? Here’s How to Fix It!

06 Apr Paid a Relative Money Recently? Here’s How to Fix It!

If you have recently repaid a relative for money you borrowed, your bankruptcy lawyer has probably told you that the trustee will attempt to get this money back from the relative to whom you paid it. This is because of Bankruptcy Code section 547, which allows the trustee to recover money repaid to a relative for a debt in the one year before a bankruptcy is filed.

No doubt this is an unpleasant idea — after all, who wants their relatives to be dragged into their bankruptcy case? No one, of course. Thankfully, however, there is an easy fix for this problem which is almost guaranteed to work: get the money back, then after you have received it, file the bankruptcy.

This works because of section 547(c)(4), which prevents the trustee from recovering a preferential repayment if the creditor has provided equivalent “new value” (which includes money) to the debtor after the repayment. Depending on the exemptions available to you in your bankruptcy case, you can either spend the money on necessary items before you file, or you can file bankruptcy while you still possess the funds and claim them exempt.

Be sure to list the relative as a creditor, if as a result of getting the money back you still owe a debt to that person.  Because the bankruptcy law allows you to repay a creditor after the case is finished, listing a relative in your bankruptcy doesn’t have to hurt them.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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