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Paying Back Family Members Just Before Filing Chapter 7 Bankruptcy.

What happens when we repay legitimate loans from family members shortly before filing a bankruptcy case? It is not unusual for a client to have repaid money to a family member, a friend or even a regular creditor within a few months of before meeting with counsel to file a bankruptcy case. The scenario is like this: Mom loaned me $4000.00 to get an apartment a couple of years ago and I have been paying her back $200.00 a month for the last year to repay the loan. Or, I just got my tax refund and repaid my brother the $2,000.00 loan he gave me as a down payment on my car”

Normally there will be no documentation of this as a loan and in often if you would call Mom or Brother they might say her daughter can pay back the money if they can or even that there is little expectation of repayment at all. Assuming the client really did borrow the funds. There nothing wrong with paying back a real loan to family members or others. Once you file bankruptcy the process has as one of its functions a mechanism to make sure all creditors are treated fairly. For regular creditors like a Visa card if you pay back more than $600.00 within 90 days before a bankruptcy is filed those funds can be recovered for the benefit of creditors. With relatives this time period is expanded to 1 year from the date the bankruptcy is filed.

The client is often surprised: “Mom really did loan me the money”. The purpose is not to punish you or the family member. The purpose of this feature is to make sure creditors we like don’t get a better deal than the ones we don’t care about. There are defenses to preferences as these recoveries are called. The ordinary curse of business defense in the case of family members will not be of much help since loans between family members are probably not “in the ordinary course of business”.

In most cases a relatively small preferential transfer to a family member may be so small that it is not worth it for the Chapter 7 trustee to go after. An experienced Maryland Bankruptcy lawyer can help you evaluate the risk associated with these repayments. An experienced Maryland Bankruptcy attorney can also help you figure out other options to deal with the transfers such as determining whether it would pay for the chapter 7 trustee to go after the relative. There are other options including a negotiated repayment plan by the relative or by the debtor and the possibility of a reduction of the total that needs to be repaid. An experienced Maryland bankruptcy attorney might even be able to help you insulate the transaction legitimately from being recovered, with proper planning.

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