Dear Bankruptcy Adviser,
If I file Chapter 7, is it true that the payments to creditors in the previous 90 days will be called back by the trustee?
When dealing with payments to creditors, there are two important time periods in bankruptcy that must be disclosed in your paperwork.
Please note, this is a very technical portion of bankruptcy law, and my statements are vague and general. You must consult with an attorney if you believe you may have an issue with payments made to creditors.
The bankruptcy code permits a trustee -- the person assigned to your case as a representative of your estate -- to recover payments made to creditors shortly before the bankruptcy filing. When you pay one creditor more than another, bankruptcy law considers that you are "preferring" one obligation over another.
This is the type of payment that the trustee is permitted to take back from a creditor and bring that money into your general estate. From there, all creditors will receive a portion of that money based on their priority -- from the IRS to your department store credit card.
The trustee typically does not look to recover payments made to your secured creditors, like your mortgage company or your car lender. And most payments under $600 made to credit card companies prior to the filing are also of little interest to the trustee. The amount of work required to have the creditor turn over the money usually is not worth the money he or she will earn for that effort. However, this is not a rule, and some trustees will take the time to recover anything they can.
However, the trustee is interested in payments made to family members -- called "insiders." The trustee can look back one year to recover this type of payment. Obviously, the amount you paid will be of most interest.
If you paid $500 for a loan to your uncle five months ago, the trustee is unlikely to pursue that type of payment -- even though he legally can. But if you paid him $50,000, then this will be of greater interest. The trustee will investigate and determine the financial status of your uncle. At that time, he or she will determine whether to pursue or ignore the recovery of the payment.
A trustee makes his or her living paying back your creditors. He or she gets paid a percentage of the payments made to creditors. Therefore, $50,000 might earn the trustee enough to make it worth the time.
Be very careful and make sure to disclose all payments made to general creditors in the past 90 days and all payments made to family in the past 12 months. An attorney should make sure you responsibly and legally handle this issue. If you file on your own, make sure you disclose that information as well.
Lying on your petition is perjury and the FBI does investigate acts of fraud. Your case can be dismissed, and you could be barred from filing bankruptcy again. You might be able to avoid an even more unpleasant bankruptcy experience with some prudent planning.