Family Debts, Loans, Payments, and Repayments in Bankruptcy

27 Jan Family Debts, Loans, Payments, and Repayments in Bankruptcy

Dear Jane,

Your motherentrusted her funeral expense money to you last year. Youspent it on living expenses. You don’t wantyour mother to get notice of the bankruptcy as a creditor because you are very much ashamed. Yousaid that you were hoping to repay your mother with yourexpected tax refund, andasked if we could forget that you brought it up.

Let’s go through this slowly.

Every bankruptcy filer has a personal meeting with a trustee, who is appointed by the U.S. Department of Justice. The meeting is in a fairly public room with five rows of chairs filled with other filers waiting their turn, while the trustee sits before a table in front of the room with one filer and the attorney.

The filer raises her right hand and takes an oath to tell the truth. The meeting is recorded. There’s a big sign right behind the trustee that warns of five years in jail and a $500,000 fine for perjury.

Then the trustee directly asks you if you’ve listed all your debts. He directly asks If you owe any money to a family member. And he directlyasks if you’ve paid any money to any family member during the past year.

Next, the trustee directly asks you how you spent the tax refund.

So, Jane, I ask this question to you quietly and without judgment: How good a liar are you? If you’re like each one of my other clients, you won’t even be able to sleep before the meeting – never mind maintaining the lie, the perjury, at the recorded meeting with the trustee

Now (I say jokingly, but to make the point), jail may not be a bad thing. You get a dry room. You get three meals a day. You get an hour of exercise a week, which may be more than you’re getting now. You get a roommate named Bubba.

Get my point?

No, Jane,we can’t forget about this debt to your mother. I’d be doing you wrong to counsel you otherwise. You might be denied your bankruptcy protections from your debt, and you’d have every right to sue me after you got caught.

Not to make a big deal of this, but my initial intake form asked about “Loans From Family Members or Friends: Name, Relationship, Amount, Purpose (MUST DISCLOSE)!!!” You told me that your mother gave you $500 over the past year. You’re certainly not the first client in this situation, which is why I put that in my form.

I hasten to add that you just brought it upbecause you know in your heart that it was wrong to hold back the information from me.

Repayment to your mother is what we call a preference, where you preferred one creditor over the others. (You know, those poor innocent credit cards.) A trustee has one year to sue (yes, sue) your mother to recover the repayment and redistribute the money to all your creditors pro rata. So, you can repay her and we’ll wait a year. We’ll see if your new situation in the future requires an adjustment of fees.

Or you can tell me that you swear to G-d and hope to die that (1) you’ve told your mother that you spent her money, and (2) and that she said you don’t need to repay her, that it was a gift. (You’ll still have to disclose it as income when we get closer to the bankruptcy filing but she won’t get notice.)

I’m very serious about the possibility of perjury. I hope you trust me on this.


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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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