Preferiential Payments

[jb300]

I am trying to help someone and this wasn't an issue when I filed my BK for me.

Explain to me what happens if someone is going to try to file a Chapter 7 soon, they have gotten back a decent, at least 3-4K tax refund now and have paid back a personal loan to someone for $2500?

The loan wasn't in the name of the person who is going to file but it is money owed to a friend. She doesn't want it to end up in the BK.

When she is under oath and they ask about payments over $500, would she have to mention this?

What options does she have to pay back this money and not have a problem?

What is the look back period for these payments?

Also will they be looking at checking accounts to see how money has been spent? My understanding is they are right on the line for Chapter 7.

Thanks

[mtbc]

They may luck out. Friends who aren't family or business associates or anything may not technically be insiders? If that were so, then on the Statement of Affairs the lookback would be 90 days rather than a year. Was she already insolvent when she made the repayment?

The tax refund may get included as income that affects DMI and eligibility for chapter 7. And, as she's close to the borderline, there could well be extra scrutiny. Even if they don't often look too hard at things, they certainly can, and it's best to be prepared for that possibility -- they easily can ask for a bunch of bank statements and ask about transactions that stand out. Even if there's an arguable case here, there's effort and uncertainty in trying to argue it.

It may well be worth this person's time talking to a few lawyers to get a read on this and see if there's one she's comfortable with. I only went pro se because I knew I had plenty of wiggle room in various respects -- I'd planned the filing a couple of years out -- my last large payment to anybody remotely like an insider was well over a year before I filed, and we are even making my mother in law wait to be paid back by us! With the main large creditor whom I hadn't been paying, I already had the argument there that we'd tried and failed to get any kind of statement or bill out of them lately, and indeed a "sorry, we're still hunting for the file" letter back from them.

Sorry I'm so vague. (-: But I can't give legal advice, and this case isn't sounding very clear-cut to me yet.

[jb300]

I will be interested in some other opinions on this.

[mtbc]

So will I! (-:

[justbroke]

Explain to me what happens if someone is going to try to file a Chapter 7 soon, they have gotten back a decent, at least 3-4K tax refund now and have paid back a personal loan to someone for $2500?

If this was payment on an unsecured loan -- which most personal loans are -- then it is an "avoidable" preference. What will happen is that if they file, the Trustee will go after the person that they paid back. Nothing happens to the debtor themselves. However, they may feel guilty and now have to either pay the person twice, or intervene in the Trustee's lawsuit against their friend, and promise to pay it themselves.

The loan wasn't in the name of the person who is going to file but it is money owed to a friend. She doesn't want it to end up in the BK.

Doesn't matter. Even if I loaned money to your friend... the transaction is between your friend and I... not your friend and their source of the money that I used to loan to your friend.

When she is under oath and they ask about payments over $500, would she have to mention this?

Absolutely. The question is "Have you made any large payments, over $600, to anyone in the past year?" That's pretty cut and dry and has no wiggle room.

What options does she have to pay back this money and not have a problem?

She would still have to mention it to the Trustee and then when the Trustee seeks to avoid the payment, step in and ask if she can settle it herself.

What is the look back period for these payments?

One Year. Whether the person from whom the loan was made... is an actual insider, is for a factual determination, so I can't speculate on that.

Also will they be looking at checking accounts to see how money has been spent? My understanding is they are right on the line for Chapter 7.

Yes! This is one of the best ways, other than an income tax return, for the Trustee to see what was actually happening with money. (Unless the person is dubious and kept a lot of cash transactions under the table.)

[jb300]

Thank-you very much for the info, pretty much what I thought it would be.

[mtbc]

If it's over 90 days before filing, wouldn't the trustee have to show it was an insider in order to avoid it?

[justbroke]

If it's over 90 days before filing, wouldn't the trustee have to show it was an insider in order to avoid it?

Let's back up to what a Trustee "might" do, and this is pretty much standard practice. Sue everyone, then sort it out later. Really, that's the way they do it. Sue everyone, and then see who complains and defends the suit.

I would say, it depends on the relationship between these friends. Courts in my District have generally found that "friends" are not "relatives" for purposes of the 90 days to one year exception in 11 USC 547 (on preferences). Personally, I agree that the person should seek professional advice in this area of practice. This may not be cut and dry across the different Districts.

I will say, that the Trustee's interest will be piqued when they see this payment. Whether the Trustee will use the "standard" brute force... sue them all, let God sort them out, or take some time to figure out if the person is truly an insider... is just not something I can foretell.

[jb300]

How much scrutiny will the the tax refund that they have just gotten and will use to make this payment with be looked at?

I didn't know for sure how closely they looked at the tax refunds that happen before filing.

Do they make them account for how that money is spent if they file, say a few months from now?

[justbroke]

How much scrutiny will the the tax refund that they have just gotten and will use to make this payment with be looked at?

A standard question, when the Tax refund was recent and large, is... "how much was it, and what did you do with it". That's on top of the question I posted above, which is the "actual" question the Trustee's ask.