Can You Pay Back a Family Loan Before Filing for Bankruptcy?

You may want to pay back a loan from your family before filing for bankruptcy, but doing so may not be in your best interests.

Many debtors have certain debts that they would like to pay off prior to filing, but bankruptcy law is designed to treat all creditors fairly. If you give your family member all of the money you owe, you will have fewer assets left to distribute amongst your other creditors. And in the eyes of the bankruptcy court, you may be giving one creditor an unfair advantage.

Paying off a loan before filing for bankruptcy can create difficulties for you – and for the family member you reimbursed. Here’s what you need to know to ensure your case proceeds without a problem. 

Paying Back a Loan May Be a Preferential Transfer in Bankruptcy

Taking care of a family loan before you file for bankruptcy might seem like the right thing to do, but the court may view the repayment as a preferential transfer.

Any debt you pay off in the 90 days prior to filing for bankruptcy may be considered a preferential transfer if is over $600 in aggregate. However, the rules are stricter when you have a personal relationship with a creditor. If you pay back a family member, the time period the bankruptcy court may consider it a preferential transfer extends to a full year. 

What Happens if the Payment Qualifies as a Preferential Transfer?

If your family loan repayment qualifies as a preferential transfer, the bankruptcy trustee may petition the court to retrieve the assets. This is known as a clawback suit, and the legal proceeding can result in a few problems:

• The bankruptcy trustee can take your family member to court to get the money back – and you can imagine how getting sued will affect your loved one.
• Your bankruptcy case will be delayed, as the court will not issue a discharge until the clawback suit is resolved.
• If the court finds that you made the preferential transfer for the purpose of hiding assets, your bankruptcy case may end without a discharge.

What if You Already Paid Back a Family Loan?

If you have recently paid back a loan from a family member, you may want to delay filing for bankruptcy until at least a year from the payment date. If you file earlier, you will need to disclose the debt repayment in your case paperwork – and the trustee may proceed with a clawback suit to recover the money.

Navigating the bankruptcy process and coming out with a discharge can be a challenge. If you need a fresh financial start and are planning on filing for bankruptcy, an experienced attorney can put you on the right track. For expert advice in the greater Salt Lake City area, call on the team of professionals at the Law Office of Davis & Jones

Our bankruptcy attorneys have a combined 40 years of legal expertise, and we have helped more than 20,000 Utah residents discharge their debts. We can help you, too – contact the Law Office of Davis & Jones and schedule a free consultation to discuss filing for bankruptcy today.