You shouldn’t try to repay insiders like your parents, siblings, close friends or others before you file for Bankruptcy because the Bankruptcy Court has the power to “avoid” or reverse the payment. In other words, if you repay your friends or relatives within one year of filing bankruptcy, they may have to give back the money you paid them. This is called a Preference, because the payments were made to creditors you may have preferred over another.  In this context, the Bankruptcy Code calls your parents, siblings, other relatives and close friends “insiders.”  See 11 U.S.C. Sec. 101(31).

Payments made to any creditors within ninety days of filing bankruptcy may be preferences, and if so, will be subject to being avoided by the bankruptcy Trustee.  See 11 U.S.C. Sec. 547. Not all pre-Petition payments are preferences. House and car payments, ongoing rent or utility payments, and regular payments on some types of loans in the ordinary course of business are normally outside of preference laws.

While there is a ninety day look-back for payments made to non-insiders, there is a one year look-back period for payments made to “insiders”.  This means that payments made to “insiders” within one year prior to filing can be avoided by the bankruptcy trustee.  One rationale for the extended look-back period for Insider payments is that people who are close to you have an inside edge to being paid ahead of other creditors.

Make sure your bankruptcy attorney is aware of all payments made prior to filing to discuss how best to protect you or your family/friend. If you haven’t made them yet, don’t do it . Discuss any action you want to take with your attorney. After your bankruptcy case is filed, you may choose to pay back any creditors you want and are able to pay, including your friends or family, although if you file Chapter 13 you will probably have to wait until your case is over. One thing worse than not paying your family member back is having that person sued for the return of the money, and then repaying the same debt again later.