This is the next in a series of blogs I am calling “The Big Questions.” These are the things that I usually discuss first and worry about the most when I talk to someone for the first time about bankruptcy.
We worry if you have repaid friends or family in the last year because the trustee has the power to demand that money back from them. This typically would be a disaster for the friend or family member you repaid. So, it has to be avoided if at all possible or at least addressed in some way.
The usual ways that this comes up are either use of a tax refund to repay someone or monthly payments.
An example involving use of your tax refunds:
Your car broke down and your mother offers to pay the $2,500.00 repair bill. You are grateful and so when you get your $3,500.00 tax refund a few months later, you pay her back. Then, you get sued by a collection agency on an old medical bill and suddenly they are garnishing your paychecks. You contact an attorney and file bankruptcy but some how the question of whether you repaid a friend or family member doesn’t seem to come up. You fill out a questionnaire as completely as you can and list the fact that you paid her but your lawyer doesn’t mention it. Maybe you have forgotten about it until you go to the hearing with the trustee but then remember it when you are under oath.
Either way it is now a big problem. The trustee wants your mother’s name, address and phone number unless, he or she tells your attorney, “... your client wants to make an offer...?” You leave the hearing and ask your attorney what the trustee was talking about and find out that unless you can make payments to the trustee, a demand is going to be sent to your mother to pay the trustee the $2,500.00 you paid her from your tax refunds.
An example of problems arising from repaying a friend or family member in monthly payments:
A close friend let you use her credit card to pay to replace your water heater. Or maybe it was your share of a trip you took together or for clothes for the kids for school when you didn’t have any money. You agree to repay the $2,000.00 you borrowed by paying $200.00 each month and you almost have her paid back when you get garnished and have to file bankruptcy to stop it. The trustee will want to collect the payments you made within the last year back from your friend.
The final example is if you transferred something to a friend or relative to repay them money you owed, like when you get a replacement car and instead of trading in the old car you transfer it to your brother to pay the money you have owed him for years.
In all of these situations, you may have to wait to file a bankruptcy case until it has been long enough that the trustee can’t recover them money. If you are making payments, we will advise you to stop the payments until the amount you repaid in the last year is less than $600.00.
If you can’t wait to file, you have to be prepared to make an offer to the trustee as an alternative to having them trying to collect the money from your friend or relative. We negotiate this arrangement with the trustee for you. A usually agreement is for you to pay 70% to 80% of the amount repaid in monthly payments. The trustee is typically willing to accept this kind of proposal if the payments are not going to take over a year from the time the case was filed.
Sometimes, you can go to the friend or relative and borrow more money to settle with the trustee and then make payments to them.
In any event, these are problems that have to be addressed or they could become a disaster. So you should tell your bankruptcy attorney right away if you have made any repayments to a friend or family member within the last year.