One of the first questions any good bankruptcy attorney will ask during a consultations is if a client’s debt includes debt owed to friends or family members, and if debt has been paid to friends or family members in the last year. This is very important because you cannot pick and choose who you will pay and then tell everyone else to go jump off a bridge by filing a bankruptcy.

Paying one or some creditors before telling the others to pound dirt is called a PREFERENCE for the creditor who received payment and is not allowed. When the Chapter 7 Trustee finds out (and they likely will), they can require that amount of money to be repaid into the bankruptcy estate for the benefit of all creditors. They will either get the money from the bankrupt, or they can sue the preferred creditor. If the preferred creditor is a bank, the client may not have any problem with this issue and it’s not a big deal, but if the preferred creditor is a family member or close friend, it may be the client’s worst nightmare that could have been avoided with some candid conversation and planning on the timing of the bankruptcy filing with their lawyer.

There is a question on the bankruptcy petition that specifically asks if any friends or family members have received a payment on a debt from the bankrupt within the year before the filing date of the petition. If the answer is “yes,” the details of those payments must be disclosed.  If the payment was for value received at the same time like money borrowed and then repaid within 30 days or the total of repayments was less than $500, and the case isn’t otherwise an asset case, then there is probably not going to be an issue that would be worth holding off on filing the bankruptcy. Also, if the payments are for secured debt, like if the relative or friend loaned the money for a car purchase, or as a lien against a paid off car and the lien was recorded simultaneously with the money loaned, then there is likely not a preference issue.

This is often an issue when people just got tax refunds and used them to repay family and friends who loaned them money in the past, and used the rest of the refund to file their bankruptcy. If you are considering bankruptcy, just say “no” to friends and family preference.