Bankruptcy provides financial relief for many people who are struggling to pay their debts. A chapter 7 bankruptcy case is a powerful tool that allows people to completely wipe out most types of debts without having to make any payments to their creditors. In the vast majority of cases, people who file for bankruptcy lose little-to-no property in exchange for receiving their discharge. When considering filing a chapter 7 bankruptcy case, one should be very cautious about the financial transactions they engage in with close friends and family members prior to filing their case. Although one may be acting with the best of intentions, their actions may have an unintended negative impact upon their bankruptcy case and even upon their own close friends and family members.
Paying Back Family Members
If considering filing for bankruptcy in the near future, it is typically not wise to pay back friends and family members from whom you have borrowed money. This is particularly true if the amount of money you pay back your friend or family member is large and if this amount is more than you typically pay towards other debts. If you repay a particular friend or family member a total of $600, or more, within the 12 month period before your bankruptcy case is filed, this can be considered a “preferential payment.” A preferential payment is a repayment of debt owed to a particular creditor that “favors” that creditor over other creditors. Bankruptcy law requires all unsecured creditors to be treated fairly and generally equally. Making a preferential payment to a creditor gives the bankruptcy trustee the right to force the creditor receiving the preferential payment to pay the trustee the money so that they can distribute equally amongst the other creditors. It is obvious how these kind of situations are less than ideal for bankruptcy filers (aka debtors) whom have paid back someone they care about before filing their case, who may then be subject to being legally compelled by the trustee to return the money. Paying back an ordinary creditor (not a friend or family member) $600, or more, in the 90 day period before filing a bankruptcy case may also be considered a “preferential payment.” However, this is generally a much less serious issue for the debtor as they have little interest in protecting the ordinary creditor. It is generally a good idea to wait until after one’s bankruptcy case is over to pay back their friends or family, or alternatively, wait until at least 12 months have passed from when they paid their friend or family member back to file their bankruptcy case.
Fraudulent Transfers
A fraudulent transfer occurs when a person transfers money, or property, to another and does not receive approximately equivalent value in exchange. An example would be selling your truck, worth $10,000, to your friend for $2,000 (or worse, giving it to him or her for free). Transferring money or property for less than it is worth within the 2 year period prior to filing bankruptcy gives the trustee the right to force the person to whom the property or property was transferred to return the value of the money or property, just like with a preferential payment. In the above example, the trustee could request that the friend either give the trustee the truck or pay the trustee the additional $8,000 dollars that he should have paid the debtor. The trustee will then turn around and distribute the money to the other creditors. The idea behind the trustee being able to “avoid” the fraudulent transfer by essentially taking the transferred property back to pay creditors is that the debtor theoretically could have used the additional money to pay back their creditors had they received fair market value for the transfer. In Minnesota, if the transfer was to a family member, the look-back period is actually 6 years. So, in the above-example, if the person who bought the truck was the debtor’s brother, the trustee could avoid the transfer against the brother even if the transfer took place 5 and a half years prior to the filing of the bankruptcy case. Also, if the fraudulent transfer occurred within the 12 month period before the bankruptcy case was filed, and it can be proven that the debtor had the actual intent to defraud their creditors (i.e. sold or gave away the property in order to keep it from being taken by creditors), the bankruptcy court may take away the debtor’s right to receive a discharge.
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Paying back close friends and family members and transferring money or property to close friend and family members without receiving roughly equivalent value, in exchange, shortly before filing a bankruptcy case, is generally not a good idea. Engaging in these types of transactions can be detrimental to a person’s bankruptcy case and cause harm to people whom the debtor cares about. Before filing a chapter 7 bankruptcy case, one should first consult with an experienced bankruptcy attorney. See us at Lifebacklaw.com!
