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Preferential Payments: Paying Relatives Back Before Filing

Bankruptcy Payments Friends FamilyOne of the most unfortunate situations I see in bankruptcy cases occurs when a debtor has borrowed money from friends or relatives. In the old days, people headed toward bankruptcy would pay their creditors here and there what they could when they could. Often this would lead to one creditor being paid more than the others. Creditors were right in thinking that this was unfair and so the Legislature created 11 U.S.C. 547 (b)(4)(A) which states that any payment to a creditor made within 90 days of filing can be “avoided” (reversed) if that payment is greater than what the creditor would get from the bankruptcy estate. Further, if the creditor being paid is an “insider”, the 90 days is inflated to a full year.

What is an insider? 11 U.S.C. 101(31) defines insiders as relatives, business partners, etc. So, if you owe your parents $3,000 and you’re about to file a bankruptcy, know that payments to them within a year of the time of filing can be reversed. This can cause huge family upsets and in the wrong circumstances could lead to a bankruptcy for the parents.

If you want to pay money or transfer property to a friend or relative but you also think you may need bankruptcy protection soon, please contact a Jacksonville Bankruptcy Attorney or call us at (904) 685-1200 for a free consultation.

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