When Can I Pay My Family Back During A Bankruptcy?
If you have any intention of filing for bankruptcy and you would like to pay back friends or family members first, you will need to consult with a bankruptcy attorney first. Paying back friends and family members is tricky because any payments you make within a year of your first filing will be scrutinized. The bankruptcy attorney will make sure that any payments you made were not given an unfair advantage over any others. Otherwise, the trustee will likely attempt to recapture preference payments that you made a year if they were made to a relative.
Situations Where Your Family Might Be Exempt
One exception is if you have a business line of credit that you signed a personal guarantee on. You can pay this debt back before the rest of your assets are redistributed to your creditors. Depending on how much you pay your relative, the payments may not be recaptured. If you pay under $600, this amount will not be recaptured. If the amount that you paid your family member was equal to the amount he or she would have received after the bankruptcy, this amount will not be recaptured by your family member.
Another possible exception is if you were making regular payments to your family member. For instance, if your family member lent you the money to purchase a car and you made regular payments, this is less likely to be considered an extraordinary payment. What the courts are looking for are situations where you rush to pay your family members before selling off your assets.
Delaying Bankruptcy
When you have already paid back your family members, you may want to consider delaying your bankruptcy for a year. But consult with a bankruptcy attorney (such as one from Smith & Weer PC) beforehand because this may be unnecessary. When you are in a rush to file, to prevent a wage garnishment or a foreclosure, you can prevent the trustee from taking money from your loved ones by paying the trustee from your exempt assets. For instance, if your state allows you to keep your car, you could choose to sell it and use the profit from such sales to pay the trustee the amount you paid your relative.
Paying Your Family Back Afterward
After your bankruptcy discharge, you can still choose to pay back your family. For instance, if you paid $700 and your family member was forced to turn the payment over, you can still pay your family another $700 after the discharge.