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I was sitting at the Section 341 Meeting of Creditors waiting for my client’s name to be called. The monotonous and repetitious questions to the other bankrupt debtors were beginning to get hazy when I heard a response from a debtor and his attorney turn the usually ordinary Meeting of Creditors into an investigation into Bankruptcy Preference Payments for transfers of bankruptcy estate property.
Meeting Of Creditors Transcript
Trustee: Have you paid any creditors more than $500 within 90 days prior to filing your petition?
Debtor: No.
Trustee: Have you paid any family members or business partners more than $500 within the last year prior to filing your petition?
Debtor: Within the last year? I paid my parents back on money I owed them.
Trustee: Was that within the past year?
Debtor: It was a couple weeks before I filed bankruptcy.
Trustee: How much did you pay them?
Debtor: How is this relevant? I owed them the money. I couldn’t file bankruptcy on my parents.
Trustee: Counselor, can you direct your client to answer my questions?
Attorney: How much did you pay them?
Debtor: Probably $5,000.00.
Trustee: Was this payment listed in your Scheduled?
Attorney: Unfortunately, no. This is the first I’m hearing of this.
Trustee: What are your parents’ names, address, and phone number.
The remainder of the transcript got somewhat contentious, but the bankruptcy trustee eventually got the information he was looking for.
What are Bankruptcy Preference Payments?
Why was the questions pertaining to payments made by the debtor to the family members relevant?
11 U.S.C. 547 of the Bankruptcy Code allows the bankruptcy trustee to avoid a transfer made for the benefit of a creditor, within 90 days of the bankruptcy filing for ordinary creditors, or within 1 year of the bankruptcy filing for insiders, such as family members and business partners. The transfer must enable the creditor to receive more that it would under a Chapter 7 Bankruptcy Liquidation case had the transfer not been made.
Boiled down to it, a debtor can’t prefer, or give preference, to pay one creditor over another. It’s fundamentally not fair.
The debtor owed his parents money. In this instance, the debtor gave preference to his parents to the exclusion of all of the other of debtor’s creditors. These bankruptcy preference payments, from debtor to family members, can be avoided by the trustee. The parents would need to turnover the $5,000 they received so the trustee can distribute it equally among all of the creditors equally.
How to Protect Family Members from Bankruptcy Preference Avoidance?
Regardless of the situation, if you owe a family member money, the creditor must be listed on the debtor’s bankruptcy filing and the debtor owed would likely be granted a discharge of debt. Nothing prevents the debtor from paying the family members after the debtor’s bankruptcy case is over. A debtor should discuss his intentions with the family members, but when a discharge is issued, the debtor technically is no longer obligated to pay back the family members.
Under no circumstances should the debtor pay money to family members for a debt owed prior to the bankruptcy filing. If the debtor has money saved up intended to go to the family members, there may be a way to exempt the money so it could be given to the family members after the bankruptcy case is closed.