1 Thing You Shouldn't Do Before Bankruptcy

Bankruptcy is intended to be a fair process. You get out from the burden of overwhelming debt. Your creditors get a chance to be heard and receive any available assets from your case, if there are any at all. In order for you to get forgiveness on your debts, the court looks to make sure all of your creditors are treated equally according to the law. However, if you paid any creditor before your bankruptcy is filed, the court will determine if they must relinquish that payment so that your other creditors get a chance at that money, too.

The court is particularly picky about payments to one type of creditors - family, close friends, and business partners, known as "insiders". 11 U.S.C. § 101(31). The court knows that you’re likely to choose to repay them over other creditors. So, they carefully review at any payments you make to friends and family before filing.

Payments to these "insiders" are called preference payments and they’re prohibited by bankruptcy law. If you repaid your friends and family within a year before filing bankruptcy, the court may “avoid,” or reverse, the payment. They can actually make a formal legal demand for money from your relatives. So, if you paid back a debt more than $600 to a relative or friend within a year of your bankruptcy, the trustee may try to get that money back.

In addition to actual cash payments, the court will look at any transfers of property. They don’t want people to transfer property to friends or family in order to hide it from the bankruptcy process.

Keep in mind that the insider must be a creditor. So giving an old car to your children as a gift won’t trigger the rules, but giving your old car to your aunt in payment of a debt to her, would.

Often times, you can settle with the trustee for a fraction of the amount paid an insider. The trustee may even allow you to pay the preferential payment amount to the trustee over several months in some sort of payment plan. If you do not want the trustee to contact your family member, but need time to pay the money to the trustee, you can pay the amount over the life of the bankruptcy through a Chapter 13.

In fact, preference payments need not be made to friends and family. If you repaid any creditor within 90 days of filing, the court will examine the payment to determine if it qualifies as a preference. Perhaps you were worried about keeping your car and chose to pay it off before filing without making payments to your other creditors. That may be deemed a preference and the money may be clawed back by the bankruptcy trustee.

The court isn’t going to claw back every payment you’ve made in the three months before you file. Regular payments, such as your mortgage, vehicle, rent, and utility payments are allowed. The trustee is looking for payments that are out of the ordinary or unnecessary.

It's a good idea to disclose any payments you made to creditors to your bankruptcy attorney. He or she is in the best position to advise you on your options.

Since 1997, the St. Louis attorneys at The Law Office of Tracy A. Brown, P.C., have helped thousands in Saint Louis stop creditors from harassing, garnishing, and threatening clients through Chapter 7 and Chapter 13 bankruptcy filings that alleviate excessive debt. Contact us today to free your future from your past.