Be careful about paying back money to family members before bankruptcy. One of the most common problems I see before my client’s file for bankruptcy is the transfer of money between parents, siblings, children, etc. This transfer can cause problems depending on how the transfer was handled.

Remember that there is a preferential transfer period that exists when the bankruptcy case is filed. If money was transferred from the debtor to a family member, the trustee appointed in the case can go after that money you paid. For this reason, it is important not to pay back the debts you owe your family members prior to filing bankruptcy.

Your familiy members are considered ‘insiders’ according to the bankruptcy code. You cannot give them preferential treatment over and above your other normal creditors. Normal creditors are typically those such as credit cards, medical bills, and collections. Giving preference to family members is considered to be a form of discrimination to you other creditors.

So when you tell Mom and Dad that you are going to file for bankruptcy and they demand the $2000.00 you borrowed, remind them of the preferential transfer period. They might get it back, but the trustee might come and get it from them.

Jay S. Jump
Washington State
(253) 479-0241