People tend to borrow money friend friends and family prior to filing for bankruptcy, usually in an effort to avoid filing for bankruptcy.  However, when the person finally decides to file bankruptcy they want to make good, and payback that relative for the monies borrowed.  Is this a good idea?  Absolutely not.

With limited exceptions, DO NOT payback personal loans prior to filing for bankruptcy.  Why?  The paying back of a personal loan triggers two different potential actions in your bankruptcy case, a preference and a fraudulent transfer.

A preference is a payment to a preferred creditor in a certain period prior to filing bankruptcy.  For Creditors that are deemed to be insiders (relative or business partner) the look back period is one year.

For creditors that are non-insiders the look back is 90 days.

Here is a brief explanation of a preference.  You owe mom and dad $3,000, Visa $20,000, and Amex $30,000.  Prior to the filing of your bankruptcy you choose to pay mom and dad back entirely and don’t pay anything to Visa or Amex.  Here you are “PREFERRING” to pay your parents rather than your other unsecured creditors.

If the trustee, in your bankruptcy, sees that there is a preferential payment he or she will likely bring an action, to recover the money, against the party who received it.  In the example above, more likely than not mom and dad would receive a letter and or a lawsuit informing them that they need to return the monies they received from you.

The more serious issue can arise when you pay money to a relative, friend, or immediate family member.  This is called a fraudulent transfer.  A fraudulent transfer is a transfer that you make, prior to filing for bankruptcy, in which you tend to shield your money away from creditors.   If a debtor is found to have made a fraudulent transfer their bankruptcy discharge can be denied.

Please feel free to contact bankruptcy lawyer Ofer Shmucher to review your situation.  Shmucher Law, PL offers free consultations in any of our South Florida office locations including Boca Raton, Fort Lauderdale, Miami, Plantation, and Sunrise Florida.