Can you repay Mom and Dad before you file bankruptcy?

On Behalf of | Jul 4, 2023 | Bankruptcy

When you first started your financial slide, you had real hope that you could turn things around fairly quickly, and your parents were supportive. They loaned you several thousand dollars, no strings attached, in hopes that you could avoid bankruptcy.

It didn’t work out. You know you’re going to have to file for bankruptcy soon, but you’d like to at least pay your parents back before you do.

Your heart is in the right place, but don’t do it

When it comes to filing for bankruptcy, there are rules and regulations in place to ensure fairness and equal treatment of creditors.

One important rule is the prohibition on preferential transfers. Essentially, this rule is designed to prevent debtors from treating some of their creditors better than others, either because they want to preserve their working relationship with that creditor or because the relationship is personal.

Under the law, your debt to your parents is just like any other unsecured debt. That means that your parents have to get in line with the other creditors you may have.

If you repay them anyhow, that could lead to big problems

Generally speaking, there’s a 90-day “look back” period prior to the date you file for bankruptcy that the trustee will examine for preferential transfers – but that period extends to a full year for “insider” creditors, like your parents.

If the bankruptcy trustee believes that one of your creditors received preferential treatment, the trustee has the power to “claw back” the money. That means your parents could be ordered to return everything (which could cause them additional financial distress).

Bankruptcy can be as deeply emotional a process as it is financial. To avoid making well-intended mistakes, legal guidance is wise.