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What Can You Do If you Paid a Relative Money Before Filing for Bankruptcy?

Paying Money to Relatives or Friends If you have made a payment to a relative or friend for a debt then it may be treated as a preference. To learn more about preferences go to:Should I Pay Relatives Money I Owe Them Before Filing Bankruptcy?

The most straightforward way to avoid a payment(s) you've already made be challenged as a preference is to wait beyond the one year since the (last) payment was made before filing your bankruptcy case. That also avoids the problem altogether.

WHAT IF I JUST CAN'T WAIT BECAUSE OF PRESSURE FROM CREDITORS?

There certainly are situations when you cannot wait for the one-year preference period to file your bankruptcy case because of intense financial pressure from a garnishment, the dire need to stop a vehicle repossession or home foreclosure, and such.

There are various "defenses" to a payment being considered a preference. Here are the two most common.

First, if the amount at issue falls under certain thresholds, the trustee is not allowed to "avoid" the payment or a set of payments at issue. In a consumer bankruptcy case—where the amount of the consumer debts exceed the amount of business debts—that threshold is less than $600 of total payments. In a business bankruptcy case—where business debts exceed the consumer ones—the threshold amount is much higher: $5,225.

Second, where the amount of payment(s) at issue is larger, the "new value" defense is probably the most practical one in this context of payments on loans from relatives.

This tactic assumes that the relative continues to be cooperative and is willing and able to help prevent the payment(s) you made from turning into a preference. The relative-creditor gives "new value" in the form of an additional loan in the amount of the payment(s) you'd made in the previous one-year period. This "new money" in effect undoes the favoritism that your prior payment(s) created.

The "new value" provided does not necessarily need to be more loan money—the relative can give you anything with a value of approximately the same as the payment(s) at issue. For example, if you paid $1,500 to this relative over the course of the last year, and he or she had a modest vehicle that you needed for your teenager to drive to school, the relative could give you that vehicle as "new value" to cover the $1,500 that you'd paid.

Also be aware that a trustee can chose not to "avoid" a preference even though he or she would have the right to do so simply because doing so would not be cost-effective. This would usually happen if the amount at issue was relatively small (although above the above legal thresholds), and perhaps would be difficult to collect from your relative. Trustees are more inclined to NOT chase a preference if he or she is NOT already collecting some unprotected assets from you for distribution to your creditors. Since that is very common scenario, especially under Chapter 7, talk with your attorney about whether would likely happen in your case.

CAUTION

The truth is that preference law overall is one of the most illogical-feeling and potentially frustrating aspects of bankruptcy. It is an area where you definitely need careful guidance from a highly experienced bankruptcy attorney.

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