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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Discharge of debtor doesn't mean bankruptcy is over
Bankruptcy Adviser

Trustee can still recover money

Dear Bankruptcy Adviser,
My husband and I recently filed for Chapter 7 bankruptcy and received our discharge. Four months later, our lawyer contacted us stating that we need to pay back the money that we paid to a relative prior to our filing. We disclosed this payment in our original petition and at the time our lawyer told us that we may have to pay back some of the money so the trustee does not sue the relative. But when our bankruptcy was discharged we thought the issue was over. Why did it take so long for us to hear about this? Why was it not disclosed to us at the time of the discharge? Any help would be greatly appreciated.
-- A.M.

Dear A.M.,
This is a great question because it concerns two issues that are commonly misunderstood about bankruptcy. Once you understand these two issues, your course of action should be obvious.

Many people believe that they are in the clear when they receive the discharge-of-debtor notification from the court. This is not true. Discharge is just one more step in a long process. The case is not over until it is closed.  

In order to close your case, the trustee must administer the case. This means that the trustee must look at all the legal issues, decide whether to try to recover some money for the creditors, complete that process and then make arrangements to distribute any money recovered to your creditors. In some cases, this takes years. Your case did not close because the trustee discovered that you made a preference payment.

What's that?

A preference payment means that you selectively paid money to one particular creditor before you filed for bankruptcy. Bankruptcy does not permit you to pay the debt and remain on good terms with the "preferred" creditor, but eliminate the debts held by other creditors. In your case, you owed money to a relative and to credit card companies (or other lenders). You preferred to pay your relative back first. However, from the court's perspective, that money should have been divided among your creditors equally.

What happened to you is that after you filed your petition, a certain amount of time went by and none of your creditors contested your right to receive a discharge. Thus, you received a discharge notification. However, the trustee assigned to your case does not end the inquiry there. The trustee gets paid based on how much money he or she is able to distribute to creditors. Even if your bankruptcy is not contested, the trustee is still motivated to find any assets you may have to pay back those creditors.

I cannot say why it took so long for the trustee to decide to go after this asset. However, it is within the trustee's power to do this. The money will be used to pay back creditors on a pro rata basis.

Here is what happens now: Either you or your relative will come up with the money or your relative will be sued. This money will then be distributed to all creditors, including your relative, who will get his or her proper share.

I can understand that you are upset because this process did not happen in a timely fashion. However, I hope that you can focus on surmounting this final obstacle and getting the fresh start you deserve.

Bankrate.com's corrections policy -- Posted: Oct. 2, 2007
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