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Why You Should Not Pay Off That Family Loan Before Filing for Bankruptcy

If you have decided to file for bankruptcy, no doubt you are eagerly looking toward a brighter future and new found financial freedom. You probably also have numerous questions and concerns about filing which should be discussed with an experienced bankruptcy attorney from a law firm like Levitt & Slafkes, PC.

Understand the Process

Any anxiety you have about the bankruptcy process should begin to dissipate as you become educated on the subject, especially with the help of your attorney. Bankruptcy can be a powerful tool for financial planning and re-organizing. It is also a tool and a process that must be treated with respect. This means disclosing everything to your attorney about your finances so there aren't any surprises later, filing with all your financial information in order--and presenting everything with the honesty and transparency required of the court.

If you are planning to file for Chapter 7 and have little income or property to deal with, this type of bankruptcy--often known as the liquidation bankruptcy--should be extremely straightforward for you. If you have concerns about paying back loans to family, however, or if you have property that you want to pass on to your children in the immediate future, it's imperative that you discuss pre-planning measures and any concerns about credit payments and the transfers of any assets with your attorney. Whether you are filing for Chapter 7 or Chapter 13, everything should add up for the trustee in terms of income, debt, assets, payments, and transfers.

Avoid All Preferential Transfers Before Bankruptcy

It's expected that you are filing for bankruptcy in good faith. In line with that, you would not want to show preferential treatment to paying any creditors before you file, such as the kindly aunt who loaned you money a while back. Whether she desperately needs the loan repaid now and you really feel obligated, or whether you would just like to make sure that debt is paid before any others-it is best not to do so within a year of filing. This could put a wrench in your bankruptcy plans if the trustee sees a red flag and suspects you may have made some financial decisions in bad faith. Your case could be dismissed or deemed ineligible for a discharge, and then you are right back to square one with all the crushing debt you were hoping to find some relief from initially.

While 'insiders' should not be repaid within a year of filing, it's also best that you don't pay substantial sums back to regular creditors 90 days before filing. If the bankruptcy trustee suspects a preferential transfer of funds to anyone you paid back, they could feasibly attempt to have the payment returned and distributed among creditors as they saw fit.

It's also not a good idea to transfer property within a year of bankruptcy. Even if that is something you were planning to do all along, such action could be viewed as fraudulent conveyance. The bankruptcy trustee will most likely ask you at your meeting of creditors whether you have sold any property recently, and even more pointedly--whether you have given any away.

Expect that the bankruptcy trustee will have had experience in dealing with many, many cases before yours. And yes, the bankruptcy court has the power to delve back into your financial history! Honesty is absolutely the best policy in terms of both actions and information if you are planning to file.

If you have questions about payments or transfers of property before filing, it is imperative that you talk to your bankruptcy attorney. Dealing with the bankruptcy court should be taken very seriously, as should pre-planning.

Please contact us at Levitt & Slafkes, PC for the answers to all your bankruptcy questions. Our experienced attorneys will review your case and explain your options to you, as well as helping you navigate through the filing process.

Call us at 973-323-2953, or contact us online to schedule a free consultation.

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