Repaying family members before bankruptcy
My colleague Craig Andresen writes about the problem of debts repaid to family members within a year of filing bankruptcy. Craig suggested having the debtor recover the money before filing in the form of a new loan; after bankruptcy, the debtor is free to repay the family member without hindrance and the new loan is protected from avoidance by the “new value” exceptions to preference recovery.
This comes about because the Bankruptcy Code gives the trustee the power to recover the money from the recipient and distribute it to creditors according to the priorities of the Code. A payment to a creditor within the statutory period that allows them to get more than other creditors is a preference.
This came up in an initial consultation I had last week. My proposed solution was a little different than Craig’s: I pointed out to my client that the client, who has a fine job but an investment disaster on his hands, could fund the preference settlement with the trustee on behalf of his relative. After all, the trustee simply wants the value that went out to the family member restored to the bankruptcy estate for the benefit of all.
Fundamental lesson, though, is that your bankruptcy lawyer can’t find solutions if you don’t disclose all of the facts.