Income tax refund time is the time of year so many of us look forward to: free money!
Of course, it’s not really free. In fact, the government has had use of our money all year and doesn’t have to pay interest back to us, so in reality, we are just getting back the money we already have paid in. No great bargain.
But if it wasn’t for this so-called forced savings account, many of us wouldn’t be able to save a dime. So when we are able to get $1,000, $2,000, or more, sometimes much more, we are so relieved. Now we can get the leaking roof plugged. We can get those new tires. We can replace the dryer. Or we can pay back friends and relatives who were there for us. They helped us out in our time of need. When we were at our lowest, they were there for us. So it is time to pay them back.
But if you are contemplating bankruptcy of any kind, this would not be the correct thing to do. In fact, it could end up a disaster. Let me explain.
There is a section of the United States Bankruptcy Code that essentially states that if you pay back a friend or relative money that you owe them, and you do this within a year of the filing of your bankruptcy case, the bankruptcy court, possibly acting through a trustee, can seek to get all of that money back from your friend or relative. They can do this by asking for the money back. They can do it by suing the other party.
Ironically, in most of these cases, if the money is left in our client’s bank account instead of paying back that friend or relative, we, as your attorneys, can protect that money, so that when the bankruptcy is over, the client, who can now pay back anyone he or she chooses, can now pay that friend or relative back.
I once had a client who, just a day before she came to see me, had paid back her brother with her $3,500 tax refund. I told her to go get the money back from him. He refused to give it back, so I gave her a letter addressed to her brother that explained the law, and how we could protect the money if he would give it right back to her and that she would be able to pay him back in a matter of months. He refused to give it back.
I gave her one more chance to plead with him. He refused a third time. I asked the client what she wanted me to do. She was being sued, and the lawsuit was going to hurt her a lot. She told me she had to file the bankruptcy, and that she had done the best she could with her brother. I filed the bankruptcy for her.
The Court-appointed trustee sued her brother, got the money back, and the money was used to pay back a small amount to all of my client’s creditors and to pay the trustee’s fees for having to go and get the money back. It didn’t have to be that way.
So before you start paying everyone back with your lump-sum of money from any source, give us a call at Steidl and Steinberg. We might be able to save your friendship or sibling relationship.