Repaying Debts to Family Members Can Create Problems in Bankruptcy Cases

In bankruptcy cases the trustee’s job is to make sure the debtor is following the rules as stated in the Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and the local rules of court. The trustee is also responsible for maximizing the money available to the unsecured creditors listed in the schedules. Trustees are given several powers so that they are able to do their job. One of these powers is the ability to avoid transfers made by the debtor to third parties if the transfer occurred within the 90 day period prior to the bankruptcy filing. In the case of transfers made to insiders this time period is extended to one year. In bankruptcy cases the term “insider” usually means family members.

Trustees are given the ability to avoid transfers so that they can ensure that all of the unsecured creditors are treated equally. When a debtor repays a debt to a family member the trustee may require the family member to turn over the money. Once the trustee has the money they will pay the funds to the unsecured creditors listed in the schedules in amounts proportional to the amount of the individual creditor’s claim as a percentage of the total claims filed. This prevents debtors from giving preferential treatment to creditors who are family members. In order to prevent the trustee from contacting your relatives to recover funds it is best not to make any payments to family members before filing bankruptcy. After the bankruptcy case is filed, debtors are free to pay debts owed to family members.