When you file a Chapter 7 bankruptcy, or even a Chapter 13, your attorney might ask you if you have paid any friends or family members any money in the last 12 months?  I ask this question to every single client I meet with and I ask it because I know the Chapter 7 Trustee is going to ask it. I get responses such as; “why does that matter?”, “but they loaned me money when I needed it”, and “I needed to pay them back, they are my family.”  I assure you I am asking this question for a specific reason.

If you hire me and we file a bankruptcy petition, specifically a Chapter 7 bankruptcy petition, you will have a Section 341 meeting.  That meeting is conducted with a Trustee, whose job is to ask you if you have any assets, and, if you do, liquidate them to pay off your unsecured creditors.  The reason I ask this question in my office before we ever file anything is because the Trustee is guaranteed to ask you this question at your 341 meeting…every single time.   You are under oath.  You will tell them the truth, and if the answer is yes to the question “have you paid back any friends or relatives any money you owe them in the last 12 months”, we have what is known as a preferential payment.

Large bills fanned out and held in hand

The rationale is this…if you have $1000 that you got through a tax refund or a bonus at work and you choose to pay your mom back because she loaned you money to get caught up on your rent, then you have just preferred to pay her back rather than your credit card bills that you are now discharging in your bankruptcy.  People don’t like this, but it does make sense.  If you are making these preferred payments to family and friends, the Trustee can actually recover this money that was paid to the friend or family member and pay off other creditors evenly with this money. If the money is not turned over it can lead to the loss of a discharge or even a lawsuit.

The reason I write this article now is because people are starting to get tax refunds.  If you are considering filing bankruptcy and you are getting a large refund and you have to pay mom and dad back, or your sister back, please consult with a bankruptcy attorney before spending that money.  It might be a good idea to file now.  It might be a good idea to file after you receive the refund and use it to pay other bills.  Your attorney can help you make sure you protect all of your money that you have been waiting the last 12 months for.

If you would like to speak with an attorney about this or any other bankruptcy related issue, please give us a call at 636-352-2030.  We offer free consultations in both St. Louis and St. Charles County.