Companies and consumers who find themselves with financial pressures often borrow money from family and friends to make ends meet with the hope that bankruptcy can be avoided. But if bankruptcy cannot be avoided, there may be a motive to pay back those family members and friends who helped out before filing the petition. Doing so can cause problems….for them.
In bankruptcy, all creditors are treated equally. Well, sort of. There are secured creditors – such as a mortgage (they have their collateral). There are priority claims, such as taxes (they get paid first). And finally, there are unsecured creditors, such as credit cards. In bankruptcy, all of these creditors are treated equally (depending on their status). And this includes those friends and family members.
Family members and friends are considered “insiders.” Any debt payments made to “insiders” during the 12 month period prior to filing the petition must be disclosed on the Statement of Financial Affairs. These payments are called “preferences.” Simply stated, the creditor got preferential treatment because he, she or it was paid while other creditors may go unpaid, or not paid as much. Those payments are recoverable by a bankruptcy trustee. In other words, your friends and family who were paid back may have to pay those funds to the bankruptcy estate.
Those are not the only payments that need to be disclosed. Payments to regular creditors that total $600 or more within the 90 day period prior to filing also need to be disclosed, and may be recoverable by trustee. However, few debtors get upset about having their credit card company pay money to the trustee. The same cannot be said about family and friends who helped in a time of need and may now have to cough up funds.
Of course, there are other factors to consider: the amount, where the relatives and friends reside, etc. But the best recommendation is to avoid preferential payments all together. After all, if you file bankruptcy and get a discharge (business entities do not get a discharge), there is no obligation to pay the debt. That does not mean that you cannot pay the debt if you are so inclined, and your resources allow you to do so. So what do you do if you owe your family or friends money and are thinking about filing bankruptcy.
Talk to them. Tell them what you need to do – and tell them why. If you have paid them money, talk to an attorney about what a trustee might do in your situation. When you file bankruptcy, list those friends and family members on your petition and give full disclosure to the court and trustee. What you do after the bankruptcy matter has concluded, and you’re back on your financial feet is entirely up to you.
Related posts:
- Settlement Offers from Creditors
- The Insider View of Friendship
- WhatsaMatta with WaMu?
- No Cake and No Discharge
- Furnishing Tax Returns to Creditors
Tags: Preferences
