Can I repay any debts before filing bankruptcy? What if I owe friends or family?

• The short answer is no.

If you repay any debts before filing bankruptcy, there is a good chance that the bankruptcy trustee will take back whatever you paid to that person and distribute it evenly to all of your creditors.  This is called a preference.

• In Minnesota, creditors can sue to recover loan repayments to friends or family even if the debtor never files for bankruptcy.

The basic idea behind bankruptcy law is that debtors get a fresh start and that all creditors get paid fairly and equally, so it is not fair if one creditor gets paid in full, but the other creditors get nothing.

In practice, however, I think that everyone knows that paying back $700 you borrowed from your grandmother is different from paying $700 on a Capital One credit card.

Congress, however, wrote the preference laws to help make sure that grandmothers get the same treatment as credit card companies.

What do you need to know?

• If you paid more than $600 to a friend, family member, or business partner in the year before filing bankruptcy, then the bankruptcy trustee will get it back from the person you paid
• If you repaid a creditor that wasn’t a friend, family member, or business partner, then the bankruptcy court can only recover those payments if they were made in the 90 days before filing bankruptcy

There are several affirmative defenses that the recipient of the repayment can use to keep the money they received, which are beyond the scope of this article.

If you are sued by a bankruptcy trustee to recover a preference payment, then you should speak with an experienced Minnesota bankruptcy lawyer before agreeing to pay.

Conclusion

Preferences are one of the many dangerous landmines that a good bankruptcy attorney can help you avoid.

My offices in Minneapolis, St Paul,  Blaine, and Brooklyn Park offer free consultations for anyone thinking about bankruptcy, so why not contact us at 612.824.4357 now and tell us how we can help you.

If you’re thinking of filing for bankruptcy in Minnesota, please come and talk to us before repaying any debts to friends and relatives.

If you have already paid back a friend or family member, then come talk to me anyhow.  I might know how to use an affirmative defense to protect that person.

We will always work with you to make sure that your family is not harmed if you file bankruptcy.