Am I Allowed to Repay My Brother Prior to Filing Bankruptcy?

   Not surprisingly, many bankruptcy filers turn to family members for loans prior to meeting with a bankruptcy lawyer.  Often these loans are “handshake loans” and not written up with a formal contract or promissory note.  Is it okay to repay a loan made by a family member prior to filing bankruptcy?

   In a word, this type of repayment can constitute a big problem in your bankruptcy case.   The Bankruptcy Code has the stated goal of treating creditors fairly - you, as the debtor, may not pick and choose who gets paid and who does not.

   Congress also recognized that individuals preparing for bankruptcy might be tempted to disburse assets “informally” prior to filing.  Therefore, the Bankruptcy Code has several provisions that specifically address loan repayments to close family members.

Preferential Payments and Recovery Actions by the Trustee

   At a minimum, the repayment of a close relative may be considered a “preference” and be subject to reversal by the trustee.  Bankruptcy Code Section 547 provides that a payment on an old debt made to an “insider” within 1 year of your bankruptcy filing may be reversed by the trustee.

   There are several defenses to preference actions and you need to speak with one of our lawyers for more specific advice about the preference law in your particular case.  Just make sure to mention any repayment of a loan to a relative that was made within the previous year.

Fraudulent Transfers and Denial of Bankruptcy Discharge

   Outright transfers of money or property prior to filing bankruptcy are even more serious than a preferential repayment of a loan.  If you simply give property away to a friend or relative prior to filing, you risk facing an action by the trustee and/or creditors to deny your bankruptcy discharge.

   Click to read more about fraudulent transfer of assets in Georgia bankruptcy cases.

   If you have given away an asset, you run a significant risk that your bankruptcy case will be jeopardized.  Make sure to tell your Clark & Washington lawyer about this situation prior to filing.

   As a general rule, we recommend that you contact our office before making any significant financial changes in your life.