You ran into some financial trouble and had to ask mom for a loan. Hey, that’s what family is all about.
It was a life preserver, but it turns out that loan was only a temporary fix. You owe lots of money to credit cards, and maybe some personal loans or medical bills. Finances have been lousy: your pay is down, your bills are up, and you are not making any real progress.
You’ve looked at the Steidl and Steinberg website and decided that now is the time to speak to someone about the possibility of filing for bankruptcy, either a Chapter 7 to get rid of all of the bills, or a Chapter 13 to reorganize them.
“Here comes the tax refund! Great! Now I can pay back mom for the $3,000.00 she lent me when times were really bad,” you think.
Don’t. At least not yet.
Paying your mother back would be considered a preference payment. While the definition of a preference payment can get complicated, it bascially means that if you pay back a friend or a relative money that you owe them for a debt that precedes the bankruptcy filing, and you pay them the money within one year of the time they lent you the money, this may show preferential treatment to that friend or relative. In these situations, it is likely that a Court Trustee will go after the friend or relative to get that money back.
I know you promised to pay her back. But it may create more problems than you expected, and could double the amount of money that you actually pay her. How does that happen?
When you file for relief under the Bankruptcy Code, a trustee is appointed to your case. This trustee is assigned your case for several reasons, including to see if there are any “non-exempt” assets that you have that the trustee can use to pay back your creditors. Our job, as your attorneys, is to advise you on the legal and proper ways to make certain that you are able to keep all of these assets if at all possible. And in a majority of cases, that is exactly what happens.
But among the assets the trustee is entitled to are payments in money or assets that you may have given to an “insider” (think relative or friend) within one year prior to the filing of your bankruptcy petition. So if you paid back your mom that $3000, the trustee is very likely to go after mom for that money. That payment is considered a preference, you decided to pay your mom instead of paying a credit card bill.
So how do you end up paying double? You’ve already paid mom that $3000, and now she has to give it back. That means that she is still out that $3000, and you will most likely still want to pay her back. So $3,000 plus $3,000 is… you get it.
Interestingly enough, if you would keep the money in your checking account, we often can protect that money, and the money would still be in your account when the bankruptcy ends. You could then take the $3,000 and pay your mom back.
So before you pay off mom, who lent you money when you were at your lowest, have patience. Give us a call at Steidl and Steinberg before you make a mistake you will regret.
Our preference is that you call us first.