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Paying Family Members and Friends Prior to Filing Bankruptcy

On October 12, 2018 by

“I paid my parents before filing bankruptcy.” Most attorneys would say it doesn’t matter. The attorneys zealously defend their clients to the exclusion of everyone else. Unfortunately, they become so focused on their clients they lose sight of everyone else. This kind of collateral damage is very prevalent in bankruptcy. A person filing bankruptcy needs to get rid of their debt, but maybe not at the cost of causing hardship to family and friends. At Klein Law Group we never lose sight of the big picture when advising our clients.

An often overlooked rule in bankruptcy that causes hardship to family members and friends is the trustee’s claw back powers. When you file bankruptcy, a trustee is appointed to represent the interests of your creditors. Bankruptcy law tries to prevent preference payments. These are payments to some creditors to the exclusion of other creditors. For example, assume you paid $1,000.00 to Capital One a week prior to filing bankruptcy, but left a balance with American Express. The trustee would be able to demand that Capital One return the $1,000.00 so that it could be distributed evenly to all of your creditors. The trustee must prove certain other things to claw back the payment, but in most cases they are easy to establish. The trustee can look back 90 days prior to the filing of a bankruptcy to claw back any of these preference payments. In most situations you may not really care if Capital One loses $1,000.00 to the trustee.

However, things change if we replace Capital One with a parent, sibling, in-law, significant other, or friend. These people are known as “insiders.” In the example above, the insider’s return of your $1,000.00 payment could be embarrassing or cause significant hardship to the insider. In addition, the trustee’s special power to claw back transfers to insiders extends to one year prior to filing bankruptcy. The attorneys at Klein Law Group might suggest delaying filing bankruptcy as the best solution to avoiding the trustee’s claw back powers.

If delaying bankruptcy is not an option, then there might be defenses that allow your family member or friend to keep the payment. For example, your payment could be protected if: the payment was made contemporaneously for something of value; the total payments were less than $600.00; the payment is secured by property you own; or the payment was made in the normal course of your affairs.     

The attorney’s at Klein Law Group zealously represent their clients, but unlike other attorneys we also keep sight of the big picture. We know that you need to get rid of debt, but maybe not at the cost of causing hardship or embarrassment to family and friends. A bankruptcy might be the best solution, but delaying the filing could protect your loved ones. We can also look at the reason and purpose of the payment to determine whether it might be protected from claw back by the trustee. This analysis is done prior to filing bankruptcy, so you know what to expect during your case. If you are considering bankruptcy, call the Klein Law Group for your free consultation.