With the U.S. economy still struggling to climb out of debt, many Americans are looking to catch a break financially by filing for bankruptcy. The final count for 2014 U.S. bankruptcy filings was approximately 910,090. And during hard times, most people turn to family members and friends to help them out, and many people have asked family members and friends for a loan. However, problems can and will happen when you attempt to pay your relatives and friends back before you file for bankruptcy.
Understanding What Is Considered as Preference Payments to Insiders
Once you have filed for bankruptcy, you are responsible for listing all of your lenders as creditors in the bankruptcy schedule. Loans given to you by family members and friends count, as long as you have both signed a promissory note detailing the terms of the loan. The bankruptcy courts will then distribute all of your assets evenly to your creditors in a fair manner.
Fair means that everyone is paid accordingly. This means that the bankruptcy courts will review all of your financial transactions prior to filing for bankruptcy in detail. If you have attempted to repay family members and friends prior to filing for bankruptcy, these payments are called preference payments. Preference payments are prohibited by law because it shows favoritism because all creditors are not treated evenly.
Legal Repercussions of Making Preference Payments to Insiders
If you have shown preference in paying back a single creditor amounting to over $600 within 90 days of filing for bankruptcy, the courts will consider whether the preference payments were made to an insider or to a non-insider. If you had a reason for making the payments, the payment may not be considered as a preference payment. For example, you may have paid a lump sum on your car loan to avoid getting your car repossessed. This is considered as reasonable.
If there is not a valid reason for making the payments, the bankruptcy trustee or attorney may argue that the payment was made in preference. This means the attorney or trustee will have every right to request for a reversal of payment. Once the payment has been recovered, it will be distributed accordingly to all of your creditors.
The moral of the story is to never pay back family members or friends before filing for bankruptcy because it is illegal. You could be penalized for trying and your bankruptcy case could be dismissed as a result. More often than not, the preference payments will be reversed and recovered and redistributed to the rightful creditors. If you have already paid back on loans from relatives or need any more advice, consider speaking with a bankruptcy attorney as soon as possible.