Student Loan Withdraw, Preferred Creditor & 341 Meeting Next Month

[Guest]

Our 341 is scheduled for Dec. 17. In September I received a stipend deposit from the grad school I'm attending. I withdrew $7K of the stipend in cash to pay off my mom for her assistance in grad school expenses. My attorney said that the $7K withdraw will raise a red flag with the Trustee since it is a large amount of money to withdraw - even though it clearly says on my bank statement it was a deposit for stipend with my school's name in the description. He did advise me that if I told the trustee I gave the money to my mom that they could go after her and sue her for it back as she would then be considered a "preferred creditor." He said he could protect cash but not my mom. The best thing to say to the Trustee is that I withdrew the money to put back for school. But, he said the Trustee may request to see proof of the cash "that I put back"! I can't ask my mom for the $7K back just as a backup plan to show the Trustee. I'm really nervous on what to do here in this situation. I don't want my mom to get involved in being sued and I refuse to bring her name up in the hearing. What is the likelihood of the Trustee wanting to see the "cash"? Couldn't I just tell them I withdrew it for grad school (which is true) and spent it? Or will they want proof? My student loans will obviously not be discharged, so I just cannot believe the trustee will go after this angle. The attorney said the two Trustees in our county are terrible and are known for being incredibly difficult, trying to get every dime they can out of people since they get a percentage. I'm really worried this is going to hang up our discharge or they will request to see the $7K in cash. Please give me some advice. Thank you.

[justbroke]

I don't want my mom to get involved in being sued and I refuse to bring her name up in the hearing. What is the likelihood of the Trustee wanting to see the "cash"? Couldn't I just tell them I withdrew it for grad school (which is true) and spent it? Or will they want proof?

First, your Attorney is 100% correct and is being very honest with you. You made what is actually called a "preferential" payment to your mother since she is an unsecured creditor. What makes it even more preferential is that she is an "insider" (who is someone that has a special relationship with the debtor, such as a relative or business partner or friend).

It is highly likely that the Trustee will inquire if you provided bank statements (or bank statements are requested) and the Trustee notices that $7,000 left the account "shortly" before filing. (Don't ask me what is shortly, but it could be anything within 90 days to more than 180 days, depending on the Trustee.) When the Trustee sees large amounts of money, they typically want proof of where it was spent. I would not LIE to the Trustee and say that I spent it on school when I did not spend it on school. If the Trustee catches you in a lie, you could be denied discharge with prejudice and the Trustee could refer your case to the U.S. Attorney. A Chapter 7 case dismissed with prejudice is the worst thing in the world. It makes all your debts prior to filing, permanently non-dishargeable. You'll have to weigh this in your decision.

The $7K will not hold up your discharge. It would hold up your case being closed. Once disclosed or determined, the Trustee would proceed to recover the money from your mother. First through a simple letter demanding the money and later via a lawsuit.

I don't envy your position but I'm sure your attorney was being really careful not to have you perjure yourself since you will be under oath at the 341 Meeting. You're going to need to hope for the best but prepare for the worst. It reads as though you don't have much money anyhow, but you could negotiate with the Trustee to pay some of that money. You would speak with your attorney about what a good counter-offer would be. For example, Trustee wants $7K but it could cost $2K in "costs" to recover that $7K so you offer $5K. Depending on the Trustee, you could pay the $5K over 6-12 months... while some may demand it in 90 days. It's a negotiation at that point.

I wish you the best.

[Guest]

Thank you for your reply, I appreciate it.

The thing that hangs me up is that this is money from a student loan, and I can use this money for school related purchases. How could the trustee request that money to be given to him to then be disbursed to my creditors when it is a student loan? Especially considering I have to repay the amount back anyway as student loans are not able to be included in my bankruptcy.

If I did enter in an agreement to repay the $7K, it would be like I have to pay it back twice. Once to the trustee, then repay the student loan. It just doesn't seem right.

[justbroke]

You chose to pay one single creditor, your mother, over paying all your creditors. You then ask the Bankruptcy Court, which is a court of equity, to forgive all your debts. That bankruptcy filing puts your dealings with creditors, prior to filing, in a different light.

Preferences are recoverable because they level the playing field where the debtor treated one creditor more favorably than others. This is especially true when that creditor is an insider, such as your mother. To keep people from just paying off their family and friends while not paying other creditors before filing, may also allow people to "hide" money. (Some people payoff family and friends for legitimate reasons, but others may do so to actually hide money or property from the Trustee and creditors.)

You would not need to pay the Trustee. Your mom would need to pay the Trustee. If you choose to pay it twice, then that is your personal choice. The Trustee doesn't force you, personally, to pay the Trustee the preference. You can't lay it at the feet of the Trustee and say it's unfair because you are not personally obligated to repay the preference, since the creditor is the one who is obligated.

In the end, the question is whether it's a "recoverable" preference which allows the Trustee to recover (go after it) for the benefit of the bankruptcy estate. It reads as though your attorney suggests that it is a recoverable preference. I like how you think about the non-dischargeable student loan angle. In the end, though, you still treated one creditor better than your other creditors. From this point, you'll just need to see what the Trustee will do/ask and go from there.

[despritfreya]

I withdrew $7K of the stipend in cash to pay off my mom for her assistance in grad school expenses. My attorney said that the $7K withdraw will raise a red flag with the Trustee since it is a large amount of money to withdraw. . . He did advise me that if I told the trustee I gave the money to my mom that they could go after her. . . The best thing to say to the Trustee is that I withdrew the money to put back for school. . . I don't want my mom to get involved in being sued and I refuse to bring her name up in the hearing.

JB, what is wrong with the above? These comments both here and on myfico.com are very disconcerting both as to what OP did or did not do and what his attny did or did not make sure he did and/or tell him.

1. The payment to mom is clearly a preference that the Trustee has the absolute right to recover;

2. This payment should have been disclosed on question 3( c) on the Statement of Financial Affairs. If the attny did not make sure it was, OP better amend the SOFA. Mom's name has already been brought up and if it hasn't, it better be. Personally, my clients would have disclosed it on question 3 AND question 10;

3. If OP does not want mom being sued or even contacted OP will need to work out a repayment plan with the Trustee. The Trustee should give him that option. In my district such repayments can be over a 6 to 12 month period depending upon the Trustee.

The thing that hangs me up is that this is money from a student loan, and I can use this money for school related purchases.

But you didn’t. You used "the bank of mom" for the "school related purchases". Had you purchased books, paid tuition etc directly, you would not be in this precarious situation. What you did with the money instead, was to pay back a creditor who just happens to be mom.

OP, you need to sit down with your attny and make sure this transfer/preferential payment is properly disclosed. Then determine, based upon the Trustee assigned to your case, how you can settle the matter with him/her.

Des.

[justbroke]

Des, what's wrong? I guess we both see the desire/attempt to "hinder, conceal or delay" the Trustee. I'm just not sure there is any argument as to whether it's a preference. The only question I have, since I've never experienced this issue directly, is whether it's a recoverable preference.

Des, you have clearly answered the question of whether it's an insider preference and it clearly is recoverable. Thanks.

I 100% agree with you, Des, that this should have been disclosed up front. I didn't even think about the disclosures on the SoFA. This should not be hidden.

[despritfreya]

I 100% agree. . . this should have been disclosed up front. . . This should not be hidden.

Exactly. And I have deep concerns if OP's attny failed in this regard.

Des.

[Guest]

Thanks all for your comments. I'm going to make an appt with my attorney and get this straightened out. The only option is to be upfront about it and if the Trustee wants the money back, I'll have to pay it back. That's all there is to it.