Can I Repay a Family Member Before Filing Bankruptcy?

This is tax refund season, and you may neFiling Bankruptcyed to use that money to repay a family member that covered some expenses for you this past year.  If you think that there’s a chance that you may need to file bankruptcy in the next 365 days, then DO NOT repay a family member with your tax refund!

Here are some things to consider before repaying a family member:

Regarding Chapter 7 Cases

If you are going to file a Chapter 7, and your attorney has determined that the tax refund is “exempt,” then simply repay your family member after you file your Chapter 7 case with the Bankruptcy Court.  That’s the easy way to avoid problems with your tax refund.

If you pay your family member in the 365 days before filing bankruptcy, then the Chapter 7 trustee can go after that payment and demand that your family member pay it to the trustee so that the trustee can pay that money to your creditors.  However, if the total amount of the payments made to a family member was small, then the trustee will not bother taking any action.

How much can you repay your family member before filing bankruptcy?  How much is too much?  What is the minimum amount that the trustee will go after?  These are questions that you should ask an attorney that practices where you reside.

The lowest amount that I’ve seen a Chapter 7 trustee go after were payments that totaled $2,900 in the 365 days before the Chapter 7 was filed.  The expenses of the trustee totaled $2,400, and only $500 of the $2,900 recovered went to the debtor’s creditors.

Regarding Chapter 13 Cases

If you are going to file a Chapter 13, then your family member must be included in the plan with all of the credit cards and personal loans.  That means that they may not get paid much and they will have to wait a long time for the money to come from the Chapter 13 trustee.  Most clients don’t want their family member to have to wait years to get repaid.

If you pay your family member and file bankruptcy less than 365 days later, then the trustee can demand that your family member pay back what you paid to your family member.  If the amount you want to pay your family member is small, then the trustee will not do anything.  What is a small amount in this context?  Although there is no simple measure, it is certainly less than the $2,900 mentioned above in the context of a Chapter 7 bankruptcy.  The best advice is to discuss this with a bankruptcy attorney before you make the payment.

I regularly have clients tell me in an initial consultation that they repaid a family member thousands with their tax refund money.  In some of those situations, we were able to still proceed with filing.  In those situations, the client’s Chapter 13 plan was going to pay enough to unsecured creditors such that the repayment was not an issue.  In other situations, clients chose to wait to file bankruptcy until after 365 days have gone by since they repaid the family member.

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