If you recently paid back a loan from your parents, the bankruptcy trustee may be able to recover that money and distribute it among your creditors if you file for Chapter 7 bankruptcy too soon. This is because bankruptcy law does not allow you to prefer one creditor over another. As a result, bankruptcy trustees have the power to avoid any payment or transfer of property deemed to be a preferential transfer (also called a preference). Read on to learn more about how delaying your bankruptcy may be a good idea if you recently paid back your parents.
What Is Considered a Preferential Transfer?
Whether the trustee can avoid a payment or transfer as a preference depends on the amount of the payment, when it was made, and who the creditor was. Normally, preferential transfers include the following:
Payments to creditors within 90 days of bankruptcy. If you made payments (or transferred property) totaling over $600 in aggregate to a creditor within 90 days of your bankruptcy filing while you were insolvent (meaning your debts exceed your assets) and that payment allowed the creditor to receive more than it would otherwise have in your Chapter 7, then the bankruptcy trustee may avoid that transfer. Also, keep in mind that the law presumes that you were insolvent in the 90 days preceding your bankruptcy. This means that if you want to challenge the trustee’s avoidance, you would have to prove that you were solvent when you made the transfer.
Payments to insiders within one year of bankruptcy. If the creditor was an insider (such as your parents), the same rules apply except that payments or transfers will be considered preferential if they were made within one year of your filing date. This means that you may need to delay your bankruptcy even longer if you paid back your parents.
What Happens If You Made a Preferential Transfer?
If the trustee determines that paying back your parents was a preferential transfer, he or she can get the money back from your parents for the benefit of your bankruptcy estate. Unless you made the payment with the intention to defraud your creditors, preferential transfers are not illegal so you will not get in trouble. However, your parents will probably not enjoy the trustee taking back their money. (To learn about options your parents have if this happens, see Your Options if the Bankruptcy Trustee Sues for a Preferential Transfer.)
Delaying Your Bankruptcy Can Get You Outside the Preference Period
As we discussed, your parents are considered insiders so any payments you make (over $600 in aggregate) may be considered preferential transfers if they were made within one year of your bankruptcy. As a result, if you don’t want the trustee to avoid the transfer and recover the money from your parents, consider waiting until at least a year has passed since paying back your parents before filing for bankruptcy.
For more information on when to file for bankruptcy right away, and when to wait, see our Timing Your Bankruptcy Filing area.