First of all, kudos for being the kind of person who honors their debts and cares about maintaining relationships! When you’re struggling with your finances, it can be difficult to repay money you owe. This is especially true for bankruptcy filers who often owe several different debts to different people and creditors. Be aware that if you prioritize repaying one debt over another, your bankruptcy trustee can take the money back.
Here’s why: Under bankruptcy laws, all your creditors have to be treated equally. You can’t prioritize repaying one debt over another. Though it’s a perfectly natural instinct to want to repay your friend or family member who lent you money to help you get through a rough patch instead of paying a faceless credit card company, that’s not how it works in bankruptcy.
If you chose to prioritize paying back “insiders" (people close to you) instead of paying back businesses like your credit card company, the bankruptcy trustee may try to take some of that money to distribute it to the other creditors you owe money to.
Let’s Look at an Example
Say John owes $10,000 to his credit card company, $10,000 to his bank, and $10,000 to his boss. He decides to pay back the $10,000 he owes to his boss but doesn’t pay anything to the bank or the credit card company. A month later, he files Chapter 7 bankruptcy.
In his bankruptcy petition, John lists all his income, debts, and assets, as well as payments he’s made in the last 90 days to creditors, and payments he’s made in the last year to insiders. The trustee sees the payment John made to his boss and contacts John's boss to get the $10,000 back. Then the trustee distributes that money more equally to all John’s creditors. He gives $3,000 to the credit card company, $3,000 to the bank, and $3,000 back to John's boss. He keeps $1,000 as his fee for securing the money. Finally, John gets his discharge, and the rest of his debt is forgiven.
What Trustees Consider Regarding Repayments
Whether you repaid your boss, a friend, and/or a family member, you probably want to know if the trustee will come after the people you care about for the money. The answer depends on a few factors:
What was the amount of the repayment? If your repayment was $600 or less, by law the trustee isn’t allowed to reclaim that money and you don’t need to report it on your bankruptcy forms.
Does the trustee know and care about the repayment? It’s incredibly important that you list all repayments you made that were over $600. Don’t try to hide anything from the trustee. If you do, you risk the court denying your bankruptcy or pursuing you for bankruptcy fraud. That said, your trustee may not notice or care about certain repayments you made. Trustees are people too and sometimes they overlook things.
Is it worth the trustee's time to try to get the money? Trustees are usually highly paid lawyers, and the time they spend trying to get money back from people is time they don’t have to make money doing other things. If a trustee makes $200/hour and it’ll take them 10 hours to get $1,000 back from your dad (of which the trustee earns only a small percentage) it may not be worth it to them to try to get that money back.
Who did you pay? Trustees know what it's like to have friends and family members, and most of them understand that trying to take back the money you paid to yours could damage those relationships. Sometimes this means that they won’t attempt to collect on personal repayments.
Will the trustee be able to collect the money? If the person you repaid has spent all of the money and doesn’t have any assets for the trustee to collect, the likelihood of the trustee trying to collect the repayment is low.
How Do I Talk to My Family or Friend About This?
Because there aren’t any hard-and-fast rules about when trustees will and won't attempt to collect repayments that you made to insiders, it’s important that you talk with the people who might be affected. This can feel scary, but don't panic. Most of the time your loved ones will be happy to help you do what’s necessary to get your life back on track. This is especially true if the odds of the trustee trying to collect money from them are low based on the criteria above.
We’ve worked with debtors in the past who’ve had success using messages like this one to explain what’s going on to their friends and family:
"Hey Dad, thanks again for loaning me that $1,000 at Christmas. I couldn't have paid my bills without it! I’m taking steps to get my financial life back on track, and the biggest and most important of these steps is filing bankruptcy to eliminate my debt. As part of that process, the court requires that I tell them about any repayments I made to friends or family during the past year.
Because I paid you back the $1,000 you loaned me, there’s a chance that the trustee may take a portion of that back from you to repay other people I owe money. I know you spent the money and that your finances are tight this year, so the odds are low, but I wanted to give you a heads up.
There’s nothing I can do to prevent a collection effort, but if it happens, I will pay you back ASAP once my debts are discharged. Because I won’t be paying a ton of money to my credit card companies each month, it shouldn't take me long. I'm really sorry about this, and I SO appreciate you supporting me as I get my life back on track!"
It’s up to you how you want to handle discussing repayments you made to insiders. The important thing is that you report these repayments on your bankruptcy paperwork. When in doubt, you can always ask your trustee what they might do about a specific repayment that you made. The court will send your trustee’s contact information to you after you file.
If you repaid friends or family, take a deep breath, be honest with them about what might happen, and think about how good it’s going to feel to get your fresh start. Who knows, maybe you can even be the one lending them money next time! You've got this, and we’re here to support you if you need any help.