Can You Repay Personal Loans Prior to Filing Bankruptcy? A Good Way to Get Your Grandmother Sued ...
It is generally not a good idea to repay personal loans prior to filing bankruptcy. Following a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, you may repay any debt you choose regardless of the fact that it has been formally discharged in bankruptcy. There is nothing in the US Bankruptcy Code or Michigan state law which prevents you from voluntarily repaying a debt that has been discharged in bankruptcy. Therefore, debtors with outstanding debts to friends or family-members for personal or other types of loans do not lose the ability to repay those loans. There is no reason to hurry to repay personal loans prior to filing bankruptcy. The bankruptcy affects only that friend or family member's ability to collect on the debt short of the debtor's voluntary repayment of the debt. If you repay personal loans prior to filing bankruptcy, however, such repayments can be recovered by the Chapter 7 Trustee as so-called "preference payments" in order that the funds repaid be equitably distributed amongst all of your creditors (after the Chapter 7 Trustee takes a fee and pays his own lawyers with your money, that is). In other words, repaying a personal loan prior to filing bankruptcy can be a good, fast way to get the family-member or acquaintance to whom you repaid the money sued by the Chapter 7 Trustee.
Don't Repay Personal Loans Prior to Filing Bankruptcy: The Legal Framework
But why? Isn't it the "right thing" to do? Many people who need to file for bankruptcy for unrelated reasons wish to pay off personal loans to family-members, friends, and corporations that they have an interest in, or to employers or other individuals who have an influence over them prior to filing so as to maintain a good personal relationship with the individual or entity who made them the loan. It is not generally the case that these sorts of outstanding debts are those that have driven the debtor to consider bankruptcy in the first place (although it can be so). People are naturally inclined to try and repay these debts prior to filing both to "make good" on their personal promise and also, sometimes, to avoid having that individual listed as a creditor (and therefore noticed of the filing) in their bankruptcy petition, as all creditors must be. Nevertheless, it is not a good idea to repay personal prior to filing bankruptcy because Federal law, via the US Bankruptcy Code, makes the recoverability of such payments from the personal loan creditor very clear when the loan repayment meets a couple of criteria. Let's walk through the reasons why: Don't Repay Personal Loans Prior to Filing Bankruptcy: All Unsecured Creditors Must Be Similarly Treated The first thing to keep in mind when attempting to answer the "But why??" question is that, under the Bankruptcy Code, creditors are classified by the type of debt owed to them: secured (debts with collateral attached, such as a home loan or car loan), priority unsecured (debts with no collateral attached but which are given some priority by the Bankruptcy Code, such as child support or recent tax debts owed), and unsecured (debts with no collateral attached that are not given priority status by the Bankruptcy Code). Within each classification of debt, the Bankruptcy Code says that all creditors must be treated similarly. With regard to the non-priority unsecured debt class of creditors, in particular, if one such creditor is to receive $X amount from your bankruptcy case, ALL non-priority unsecured creditors must receive the same amount. Don't Repay Personal Loans Prior to Filing Bankruptcy: Personal Loans from Family-Members and Friends are Just Unsecured Debts without Any Special Priority Personal loans from friends, relatives, and others are simply non-priority unsecured debts no different under the Bankruptcy Code's classification than credit card bills, medical bills, and other unsecured debts. Just because you borrow $1,000 from your grandmother does not mean that that particular unsecured debt deserves any special treatment under the Bankruptcy Code. Don't Repay Personal Loans Prior to Filing Bankruptcy: Unsecured Creditors Who Have Received "Preference" Payments Prior to Filing Can Be Pursued by the Chapter 7 Trustee Thus, if any unsecured creditor is to receive any money from your Chapter 7 bankruptcy case (by way of the liquidation and recovery powers of the Chapter 7 Trustee), the Bankruptcy Code says that ALL unsecured creditors must receive the same amount. Prior to the filing of the Chapter 7 bankruptcy petition, there is a 90-day period of time known as as the "preference period," in which any payments larger than $599 made to any one unsecured creditor are scrutinized by the court-appointed Chapter 7 Trustee overseeing your bankruptcy case to determine whether a "preferential transfer" has been made. Such "transfers" are those that "prefer" one creditor over another, and, if the trustee has determined that such a transfer has occurred, he or she may reclaim those transferred funds by way of an unpleasant demand or lawsuit against the creditor. In other words, the Trustee can demand the funds with the full power of Federal law and the US Bankruptcy Code behind him or her, and, if they are not turned over, can seek a judgment in Bankruptcy Court against the creditor with potential attorney fees and other costs lumped in. "Professional" creditors know to simply turn such funds over when demanded, but "professional" creditors can also generally afford to do this. When a payment of this sort has been made to an "insider," the preference period is much longer. An "insider" is defined by the Bankruptcy Code, basically, as a family-member, a business enterprise which you have some involvement or ownership interest in, someone else who has influence over you, and, under certain circumstances, a personal friend, among other things. Any payment over $599 made to an "insider" within one year of the filing of the bankruptcy petition may be considered a preferential transfer. In other words, if you've repaid a personal loan of $600 or more to any personal acquaintance in the entire year prior to filing your Chapter 7 bankruptcy petition, it will need to be disclosed under penalty of perjury in the petition (yes, even if there is nothing "on paper" evidencing the debt and repayment), and the Chapter 7 Trustee will make a decision based upon the amount of money involved whether to pursue it. Even if it means suing your grandmother. All told, you're better off listing your grandmother as a creditor and repaying her later on, after you've filed, than hurrying to repay her before you file your petition. Most of our clients in this sort of situation have agreed that, even if, under optimal circumstances, they would have preferred not to tell their grandmothers about their bankruptcy filing, it is still preferable to do so up-front rather than either commit perjury or have grandmother contacted most unpleasantly later on by the Chapter 7 Trustee. Don't Repay Personal Loans Prior to Filing Bankruptcy: What Are Your Options If You Have Already Done So? Regularly, however, such repayments have already been made by the time someone schedules an initial consultation with the Michigan bankruptcy attorneys of The Hilla Law Firm, PLLC. Even 10 months ahead of an initial consultation with us, you may have already repaid a personal loan simply because you planned on doing so anyway, without any knowledge that, nearly a year later, you might consider a Chapter 7 bankruptcy. There are options available when this has occurred. The most obvious is to wait until 1 year + 1 day has passed from the date you repaid the personal loan before filing. However, this option may not be available to many who seek the protection of the Bankruptcy Court in order to stop a collection lawsuit or wage or bank account garnishment. The next option is file anyway and work something out with the Chapter 7 Trustee so that your grandmother is left alone. Chapter 7 Trustees, on the whole, would rather do little to no extra work and take a check from you for the preference payment amount than to even spend money on stamps and envelopes to pursue your grandmother, let alone the costs of actually pursuing her. And, if the amount repaid is not very much (this varies widely from district to district and from Trustee to Trustsee), say, only the minimum amount that must be disclosed ($600), there is a chance that the Trustee will also express no inclination to pursue it if you cannot work something out on your own with him or her. The Michigan bankruptcy lawyers of The Hilla Law Firm, PLLC are experienced in negotiations of this and every other sort with all of the Detroit and Flint-area Chapter 7 Trustees. The need to undertake such a negotiation is a primary reason why one should retain an experienced bankruptcy attorney and not attempt to "go it alone." Further, there are several defenses to a Trustee's ability to pursue a preference payment or alleged fraudulent transfer. Again, such a defense will require the services of an experienced attorney to undertake. It is possible to resist the Trustee's preference recovery powers, under certain circumstances. Finally, a further option is to file a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy. A Chapter 13 bankruptcy is not a "liquidation" bankruptcy in which assets are pursued and recovered in order to be distributed to creditors as a Chapter 7 is. In a Chapter 13 bankruptcy, you "fund" the bankruptcy process with monthly payments over 3-5 years instead. Creditors are repaid some of what they are owed through the payments you make in a Chapter 13 bankruptcy. Thus, the Chapter 13 Trustee does not pursue preference payments or other asset liquidation in a Chapter 13. Although the bankruptcy petition still requires that such payments are disclosed, your grandmother will never be pursued by a Chapter 13 Trustee. Don't Repay Personal Loans Prior to Filing Bankruptcy: The Bottom Line The bottom-line is that the possibility of prefence payments to relatives made prior to filing affecting other people you care about after you file for bankruptcy is one of the primary reasons why you should consult an experienced Michigan bankruptcy attorney such as Attorney John Hilla of The Hilla Law Firm, PLLC before proceeding into a Chapter 7 on the incorrect assumption that it will simply be a matter of "filling out forms." In a Chapter 7 in which insider preference payments have been made, there is every possibility that real litigation or negotiation over the issue and the money involved with the Chapter 7 Trustee will be required. You will not know this until it is too late, after you've filed without any right to dismiss a Chapter 7 once it becomes difficult, if you do not consult an experienced bankruptcy attorney first. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.