AP filed against me

[ma011]

I'll have to start at the beginning: Over the last year, my sister and brother-in-law were incurring a lot of debts. Unfortunately, my brother-in-law had a gambling addiction. I felt awful for my nieces and nephews, and loaned my sister and brother-in-law money throughout the year to help pay for bills and whatever the kids needed. It was about $7000 total. When they did their income taxes this year, I was paid back in full. About two months later, they filed for Ch 7 bankruptcy. I believe that their case is now close, however, I received a summon for an adversary proceeding. The trustee is wanting to recover the $7000 from me to pay off any debts of the brother-in-law.

Honestly, I've already spent the money on personal uses and my own family. They are filing this as 'fraudulent transfers'. I'm at a lost of what to do. I never intended to commit fraud. I honestly just wanted to help out my sister and her kids. Is there a way for me to get out of this? I don't even know where to start. Any help would be greatly appreciated. Thanks!

[justbroke]

It is not "fraud" as you know it, and you did not commit the act. In bankruptcy, you are not allowed to pay treat one unsecured creditor better than another. This is called an avoidable transfer. When you pay (or transfer) money to an insider, such as a relative or business partner, it's known as a fraudulent transfer. The debtor -- the person that filed bankruptcy -- is said to have fraudulently transferred the money to avoid giving it to other creditors... as a sort of "preference" over the other creditors. That is was an insider, family, makes it especially egregious. This is not "criminal" fraud and it is not saying that you, the person receiving the money, commuted this "fraud".

Unfortunately, you will need to deal with this transfer issue. It is likely that the Trustee can recover this money and that's why you are being "sued" inside this adversary proceeding (AP). You may be able to negotiate with the Trustee to pay back over time and/or to negotiate the amount to be lower... but they do not need to do either.

You may want to ask your sister to help!

[AngelinaCat]

Your sister may be offered an opportunity to pay this money to the trustee and not involve you. But it doesn't sound like that is going to happen, since you have been sued.

Your sister made a mistake by paying you in full, and not stretching the payments out over several month. That may not have caught the trustee's attention. As JB stated, a debtor is not allowed to pay any one creditor, and ignore the others. Every creditor needs to get a 'piece of the pie' each month. In that you were paid, and others ignore, that makes this a 'Preferential Payment'. In that you are a family member, that makes it an 'Insider Preferential Payment.' Both are no-nos within a year of filing BK. The longer the period between this payment and filing BK, the less likely it is that the trustee will be interested.

I hope that you are able to reach a compromise with the trustee. Please keep us posted. It is rare that we hear the outcome of this side of an AP.

Welcome to the forum!