Beware! Relatives and Bankruptcy Do Not Mix!
THREE COMMON ISSUES INVOLVING
RELATIVES AND BANKRUPTCY
SHOULD I PAY MY RELATIVE BACK FOR A LOAN BEFORE I FILE BANKRUPTCY
Example: Every year, 2-3 of our clients repay loans to a relative in the 12 months before needing to file Chapter 7 or Chapter 13 bankruptcy.
The problem: Their relatives may be sued by the bankruptcy Trustee in order to get the money back so that it can be distributed to all of the creditors, not just one!
The rule: If you pay a debt to a relative within one year before we file the bankruptcy the payment is called and “insider preference”. In other words, you preferred to pay a relative (An "insider") instead of your other “fair and square” creditors. The law says that this is unfair. The Trustee may demand the money back and sue your relative if they refuse to give it back!
How to avoid it: Pay the relative AFTER we file the bankruptcy. The rules change once the bankruptcy is filed. Discuss this with the attorney and he can help you plan it properly.
How to fix it: If you have already made the payment talk to the attorney about any exceptions that may apply to your situation so that you may make a good decision about your case. Not every payment causes a problem.
SHOULD I GIVE MY PROPERTY AWAY AND THEN FILE BANKRUPTCY?
Example: Every year, 2-3 of our clients get in financial trouble and give a relative valuable property (like money, cars, or land), get nothing in return, and then need to file bankruptcy.
The problem: Their relatives may be sued by the bankruptcy Trustee in order to get the property back so that it can be sold and distributed to all of the creditors equally!
The rule: If you give a relative valuable property/money and within 4 years of filing the bankruptcy and don’t get something of equal value in return the gift is called and “fraudulent transfer”. Though there is no real “fraud” it is considered very unfair to give your relatives your valuable property and then file for bankruptcy, especially if your creditors could have been paid from the sale of that property. The Trustee can demand the money/property and sue your relative if they refuse to give it back!
How to avoid it: Discuss any large pre-bankruptcy gifts, transfers, or sales to relatives. The rules can be complex, and the attorney can help you make a good decision.
How to fix it: If you have already made the gift/transfer talk to the attorney about any exceptions that may apply to your situation so that you may make a good decision about your case. Not every payment/transfer causes a problem.
CAN’T I JUST HIDE MY DEALINGS WITH RELATIVES FROM THE TRUSTEE?
AFTER ALL, IT IS NOT THEIR BUSINESS, RIGHT?
Being able to file Bankruptcy in a time of need is a huge gift the government gives us. Usually the only thing you are expected to give in return is honesty. If you intentionally do not list your payments or transfers to relatives then you are probably committing felony perjury and bankruptcy fraud! Thousands of people have gone to prison over such nonsense. Is that money/property you paid a relative really worth years in prison, a huge fine, and your entire case being denied? Tell us everything so that we can help you make the best decision in your case!