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Should I Pay Back Debts to My Family or Friends Before Filing For Bankruptcy?


The short answer to this question is NO! The reason why you should avoid paying off a debt owed to a relative, friend or business associate is that the Bankruptcy laws considers these people as "insiders". The bankruptcy trustee will look at any payment made to an "insider" within one year of filing for bankruptcy as possibly a preferential payment. In fact, the bankruptcy trustee has the power to undo or void any payments or transfers of property of $600.00 or more made to an "insider" within one year of filing for bankruptcy.

Why do the bankruptcy courts disfavor debt payments made to these so-called "insiders"? The answer is because the bankruptcy laws and bankruptcy courts do not want to create a situation where some creditors receive preferential treatment. Bankruptcy looks to treat all of your creditors the same. That being said, the bankruptcy laws want to treat debts owed to your mother and debts owed to VISA as the same because they are both considered unsecured creditors. Of course your mother probably does not charge interest, late fees or penalities but in the eyes of the bankruptcy court, your mother and VISA are one and the same!

If you have any questions and bankruptcy contact an Orange County Bankruptcy Attorney today at 1st California Law.

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