Do Not Pay Mom or Dad if Filing Bankruptcy

Authored by Wendy Witt, Esq.

We know you likely care more about your mom than you do corporations like Visa or Mastercard, and we think that's cool; however, bankruptcy law says that's not okay well, that's sort of what the law says.

Here's the Law: In the entire year before the day you file your bankruptcy petition, you can love your mom all you want, but you can't pay her back and not pay Visa. Favoring one creditor over another is called "insider preference" and it's strictly forbidden.

If you violate that law, the bankruptcy trustee will track down your mom and make her give the trustee the money. It's not pretty.

We'll give you an example:

Leroy lost his job and, as a result, lost his medical insurance. When Leroy suffered a heart attack, he racked up huge medical bills in the amount of $100,000 with no way to pay them back. Although, Leroy tried to meet his financial obligations, he just couldn't make ends meet.

To help out, Leroy's mom, Alice, loaned him $10,000.

When Leroy recovered, he was able to find work and he paid his mom back, but he just couldn't pay back those medical bills and gave up trying.

Leroy consulted with a qualified bankruptcy attorney to determine whether bankruptcy was a viable option.

The bankruptcy attorney analyzed all the facts, debts, assets, and repayments and agreed that bankruptcy would be required for Leroy to get out from under all that medical debt. Medical debts are unsecured debts and if Leroy files for bankruptcy under Chapter 7, all medical bills would be discharged meaning he would never ever never have to pay them back.

However, the attorney noted that Leroy must deal with the insider preferences because he had paid his mom, but not the medical bills.

Here are Leroy's options:

  • If mom still has the $10,000, have her return it to Leroy, then pay her back after the bankruptcy is finalized. Pitfall: If the $10,000 isn't protected by Leroy's bankruptcy exemptions, it will be seized and paid to his creditors.
  • Wait one year and one day from the date he paid his mom back and then file for bankruptcy. Pitfall: Creditors will still continue to harass Leroy, lawsuits can proceed, and wages can be garnished until the bankruptcy petition is filed.

Lessons Learned:

  • Always consult with a bankruptcy attorney as soon as possible, even if you're not sure whether bankruptcy is right for you or not. Get some good advice before mapping out your financial plan.
  • Don't make any repayments favoring one creditor over another without getting good legal advice first.
  • A relative of the debtor (e.g. your mom) is considered to be an "insider".

    If you're interested in reading the law, here's the link: 11 U.S.C. 101(31).You'll have to scan down to find the "insider" definition, but it just takes a moment and along the way, you'll find other helpful bankruptcy terms as well.
  • In most situations, it's best to wait until the bankruptcy is completed before you repay your mom. Remember, you can repay her even if the debt is officially discharged in bankruptcy.

WARNING: When the bankruptcy trustee discovers insider preference, the trustee will go after your mom and make her pay back that money. Yikes!

Leeway: If you owe your mom, $600 or less, it's okay to go ahead and repay her without worrying about insider preference issues. Any repayments over $600 have a risk; however, courts have let insider repayments as high as $1,500 go because it's a pain to go after disbursed funds and likely not worth the effort for that amount.

Where to Get Good Bankruptcy Advice and Insider Preference Avoidance Guidance

You local bar association likely has a list of bankruptcy lawyers or you can ask a friend for a referral, if you're okay with doing so. In addition, we invite you to use our free and private website which connects you with bankruptcy attorneys.

Feel free to explore the site; you're even welcome to consult with several bankruptcy attorneys and choose the lawyer you're most comfortable with. We're sure you'll find the answers and guidance you need. Best of luck with your financial future.

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