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.
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.
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
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.