09 Feb Show Mom How Much You Love Her by NOT Paying Her Back! (Part One)
I know you love your mother. I love mine, too. But if you’re in financial trouble, the best way to show her that you love her is to not pay her back–that is, until after your bankruptcy.
Bankruptcy law can be counter intuitive. You think something’s logical. It makes sense to you. But here comes the Bankruptcy Code, and the apple cart just got overturned.
Anyone wants to make sure mom gets repaid. That’s understandable. But while you call her mom, the Bankruptcy Code calls her an “insider.” I don’t know about you, but this reminds me of securities fraud–“insider trading.” This conjures up images of slick guys on Wall Street being led away in handcuffs for illegally profiting from “insider” information.
Relax. We’re not talking about that kind of insider. You don’t have to picture your mom in handcuffs, so banish that thought.
Mom’s an “Insider” under the Bankruptcy Code
What I’m talking about is the Bankruptcy Code’s definition of an insider, which includes a “relative of the debtor.” 11 U.S.C. Â§ 101(31). Because mom’s related to you, she’s specifically covered under this definition.
Mom’s Insider Status Matters with Preferences
Just as the term “insider” is a defined term in the Bankruptcy Code, so too, the Code tells us a “preference” occurs when:
- the debtor transfers something “to or for the benefit of a creditor;”
- for a debt “owed by the debtor before [the] transfer was made;”
- “made while the debtor was insolvent” (that is, the debtor’s debts were greater than his assets);
- made within 90 days of bankruptcy, or, if an insider receives the transfer, within one year of bankruptcy; and
- the transfer “enables [the] creditor to receive more than [the] creditor would have received” (1) in a Chapter 7 case, (2) than “if the transfer had not been made,” and (3) “the creditor received payment of such debt to the extent provided in the [Bankruptcy Code].”
Huh? Give it to me in Plain English!
Here’s what the Bankruptcy Code’s all riled up about. Generally speaking, the idea is that creditors of the same type–called “class”–should be treated the same. Because of this the Bankruptcy Code looks back anywhere from 90 days to one year for preferential transfers or “preferences.” The drafters of the Bankruptcy Code knew that a debtor would rather pay mom than other creditors like VISA, MasterCard, and Discover. Who wouldn’t, after all? There are no late fees with mom. No universal default. Mom would never arbitrarily change your interest rate. Mom’s on the up and up. Credit card issuers, well, not so much. And, after all, she’s mom.
So the bankruptcy trustee will examine any debts repaid during the preference period. If the trustee believes a preference occurred and there are no defenses, the trustee can sue the person or entity who received the payments. Yes, this means mom!
Because of these rules, you should show mom the love she deserves by holding off on those payments. You can always pay her back after your bankruptcy case is over.
In “Show Mom How Much You Love Her by NOT Paying Her Back! (Part Two),” I’ll address what to do if you’ve already paid mom during the one-year preference period.
Russell A. DeMott is a Charleston, South Carolina bankruptcy attorney who helps clients file Chapter 7 and Chapter 13 bankruptcy.
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