By Kitty J. Lin, Attorney at Law

If you borrowed money from a relative or business and you pay them back within one year of filing your bankruptcy petition, then you may have done them a great disservice.  Instead of thanking you for paying them back they may potentially be sued by your bankruptcy trustee to put the money back into the bankruptcy estate.  If you make a large payment to a credit card company or other unsecured debt 90 days prior to the filing of your bankruptcy petition the trustee assigned to your case may seek to have that money brought back into the bankruptcy estate to pay all of your creditors also.

If you have any questions regarding any preferential payments you made to creditors or relatives/insiders it is a good idea to consult with an experienced bankruptcy lawyer to determine the best course of action. Many bankruptcy lawyers in the Bay Area have no experience dealing with preferential payments. That is not true of The Law Offices of Lin and Wood. My partner, Ryan Wood, has both defended and assisted in lawsuits to recovery preferential payments in bankruptcy cases.

Under 11 U.S.C. §547(b), the bankruptcy trustee may avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor for a debt that was owed by the debtor while the debtor was insolvent made within 90 days prior to filing the bankruptcy petition to a creditor (think credit card lenders and banks) or 1 year if the transfer is to an “insider.”  The trustee may avoid the transfer if it allows the creditor to receive more than they would receive if the debtor filed a Chapter 7 case, if the transfer was not made, and the creditor received the payment of the debt.

According to 11 U.S.C. §101(31)(A), if the debtor is an individual, the term “insider” includes–

(i) relative of the debtor or of a general partner of the debtor;

(ii) partnership in which the debtor is a general partner;

(iii) general partner of the debtor; or

(iv) corporation of which the debtor is a director, officer, or person in control.

The reason the bankruptcy trustee may avoid any preferential payments to creditors or an insider is based on the concept of equality.  All of your creditors should be treated equally, whether the creditor is your mother or a huge national bank.  Essentially, you cannot pay one creditor to the detriment of another creditor.

For example, if your relative lent you money, let’s say $20,000, and you paid them back $1,000 per month for 8 months ($8,000 total) prior to filing your bankruptcy petition, the trustee won’t be going after you to repay that money – they will go directly to the creditor that has received the funds – in this case, your relative.  They will sue your relative to get the $8,000 back into the bankruptcy estate so that all your creditors can be paid equally.  Your relative will be included in the list of creditors, and be allotted whatever percentage creditors are entitled to receive in your bankruptcy case.

You may contact us at 1-877-9NEW-LIFE for a bankruptcy attorney in our office for a free consultation. We have offices in Redwood City, Oakland, San Francisco, and San Jose for your convenience.