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IF YOU OWE MONEY TO FAMILY OR CERTAIN BUSINESS ASSOCIATES, DON'T PAY THEM BACK!

Bankruptcy law treats debts to family members and business associates a little differently than debts to banks or other creditors. If you owe money to family members or business associates, and pay them back within one year prior to filing bankruptcy, then, under bankruptcy law, your family member or business associate may be forced to pay that money back, if you have filed a chapter 7. If you have filed a chapter 13, bankruptcy law may force you to pay more into your plan than you would have paid if you had not paid off your family member or business associate.

Basically, bankruptcy law may consider repayment of debts to family or business associates as a “preferential payment.” If a repayment is considered a preferential payment, the chapter 7 trustee can ask the court to “set aside” that payment. This means that the family member or business associate would have to pay the money back, or risk having a lawsuit filed against him by the trustee. In a chapter 13, the trustee may force the debtor to correct the preferential payment by paying more money into the chapter 13 plan.

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