It is very common for people in dire financial situations to borrow money from relatives. A lot of times, Debtors feel nervous about not paying back their relatives before filing bankruptcy. If a Debtor pays back a relative before filing bankruptcy, they could very likely end up regretting that decision. This is because of the definition of “preferences” under Section 547 of the Bankruptcy Code.
There are 2 kinds of preferences with which Section 547 is concerned. The first type of preference is payments totaling $600 or more to any one creditor made during the 90 days before you file bankruptcy.
The second kind of preference is any payment made to “insiders” in the year before you file bankruptcy. What is an “insider”? The term “insider” includes but is not limited to: relatives of the debtor; general partners of the debtor and their relatives; corporations of which the debtor is an officer, director, or person in control; officers, directors, and any owner of 5 percent or more of the voting or equity securities of a corporate debtor and their relatives; affiliates of the debtor and insiders of such affiliates; any managing agent of the debtor. 11 U.S.C. § 101.
Whether certain payments qualify as preferences is something that you will need to discuss with your bankruptcy attorney. Payments that may be considered preferences must be disclosed on your bankruptcy petition, on the Statement of Financial Affairs.
If you are at a point where you are thinking that you may have to file for bankruptcy, you should contact an attorney before paying back any insiders. Otherwise, if you do end up having to file bankruptcy, the bankruptcy trustee may be able to avoid those preference payments. That means that the trustee can demand those payments from your relative – and the trustee may even sue them to get the money back from them. That could lead to an awkward Thanksgiving dinner or family reunion.