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Can I pay back my mother before bankruptcy?

Posted on May 12, 2009 in Bankruptcy procedures

In bankruptcy, payments to family members within a year of bankruptcy can be a problem.  A trustee in bankruptcy can claw-back these payments by suing mom or dad.  The recovery is then divided equally among the creditors.

We just celebrated Mothers’ Day.  And of course, if our kids need help, they always feel like they can turn to Mom.  So it’s natural that when they can pay back Mom for a loan, the kids want to do what’s right.

In bankruptcy, Mom is an “insider”.  So is Dad.  So are Brother and Sister.  So are husband and wife.  So are children. And a lot of other family members.

Why do we care who’s an insider?

In bankruptcy, if you pay back an insider even for a legitimately owed debt within one year prior to bankruptcy, the trustee can sue your relative to recover the payment.  This is called recovery or claw-back of an insider preference.  We see a lot of this around tax refund time.  People recover their income tax refunds and use them to pay back mom or dad just before filing a bankruptcy case.  This is a problem.  If the trustee asks about it and finds out, the trustee will sue mom for the amount you paid her.  

So prior to bankruptcy, do contact us at Lakelaw.  We can advise you as to what you can do and what you can’t.


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