If you’re thinking about filing for bankruptcy, you may be tempted to pay back money you borrowed from friends or family first. This is called an insider payment. An insider payment may occur when you repay a loan to someone close to you, like a parent or sibling, within a year before you file your case. An insider can also be a general partner, a business partner, or anyone with a sufficiently close relationship to you. The concern that arises is that you, as the Debtor, are repaying specific “creditors” over others.
Many people don’t realize that paying back an insider before filing can create issues in their bankruptcy case. This is because the bankruptcy trustee (the person who manages your case) can make you pay that same amount back to the bankruptcy estate. For example, if you paid your mother $5,000 six months before filing, the trustee can ask you to pay $5,000 into the bankruptcy instead. That money then goes to pay your creditors.
One way to avoid this is to wait until it’s been more than twelve months since you made the repayment before filing your case. An even better approach would be to avoid paying back that friend or family member at all before you file.
It’s important to know that repaying a debt to a family member is not the same as giving them a gift. However, gifts and donations can also affect your case. If you gave anyone a gift worth more than $600 in the last two years or made large donations, you’ll need to include that information in your paperwork, too.
No matter how small the amount, all insider payments must be disclosed when you file for bankruptcy. If you have any questions about how this could impact your case, talk to an experienced bankruptcy attorney. They can help you figure out the best time to file and how to avoid unnecessary issues.
The information provided on this page is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Please contact a licensed bankruptcy attorney to determine your bankruptcy options.