I’ve filed hundreds of bankruptcies and I encounter a common issue in my practice; especially, this time of the year. Debtors (what they call people who owe money) oftentimes will pay relatives back before other debts such as medical bills and credit cards. This makes sense because you want to square up with the people you see at family functions. The big banks aren’t showing up to Thanksgiving.
The problem you have if you are planning to file bankruptcy is those payments to pay back Mom may be recoverable. Bankruptcy laws are set up to be equitable. If you are going to be able to get rid of your debts or pay a lesser amount, then there should be some fairness. One way this fairness shows itself under the bankruptcy is something called preference laws. The bankruptcy trustee (the person assigned to look out for creditors’ interests in your bankruptcy case) can recover any funds paid to relatives in the year before filing that you paid on debts you owed your relatives. They get this money back and distribute it to all your creditors equally. Your other creditors would rather get something than nothing because Mom was paid.
Why does this matter to you? If you are considering filing bankruptcy, then you shouldn’t use your tax refund to pay your relative back. I have several clients every year that pay back their relatives with their tax refund and they regret it when they need to file bankruptcy. As mentioned above, the trustee can sue your relative to get that money back. Often the debtor feels bad about the fact the trustee is going to sue their relative and works something out with the trustee to pay the trustee to avoid their relative getting sued. That means they end up paying twice. Wouldn’t it make more sense to not pay Mom? You could then file your bankruptcy and pay back Mom later. If you are contemplating filing bankruptcy, then you should consider giving us a call (and hold back on spending your tax refund).
At the law offices of Andersen, Ellis & Shephard, we have represented thousands of individuals in consumer bankruptcy filings.