First of all, kudos for being the kind of person who honors their debts and cares about maintaining relationships! When you are struggling with your finances, it can be difficult to pay the money you owe -- especially when you feel like you have to choose between paying back credit card companies and paying back the people you love.
When you owe money to several people and choose to "prioritize insiders" (people close to you) by paying them back without 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 people you owe money to.
Here's an example:
- John owes $10,000 to his credit card company, $10,000 to his bank, and $10,000 to his boss.
- John pays back the $10,000 he owes to his boss, but does not pay anything to the bank or the credit card company.
- John files Chapter 7 Bankruptcy the next month.
- The trustee contacts John's boss to get the $10,000 back
- The trustee takes the money from John's boss and 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.
- John gets his discharge, and the rest of his debt is forgiven.
While this situation may not seem all that concerning when the person you repaid was your boss, it gets a bit stickier when you repaid friends and/or family. Will the trustee come after the people you care about for the money? The answer depends on a few factors:
- Was that repayment at least $600? If not, the law does not allow the trustee to reclaim that money and you do not need to report it on your bankruptcy forms.
- Does the trustee know and care about the repayment? It is incredibly important that you list all repayments over $600 and do not try to hide anything from the trustee. Hiding repayments could cause the court to deny your bankruptcy or even to press charges against you! However, whether or not the trustee notices your repayment or chooses to care about it is an open question. Trustees are people too, and sometimes they overlook things, whether by choice or by accident.
- Is it worth the trustee's time to try to get the money? Trustees are usually highly-paid lawyers, and time they spend trying to get money back from people is time they do not have to make money doing other things. If a trustee makes $200/hour and it will take them ten hours to get $1,000 back from your dad, of which they may only earn a small percentage, the odds are good they are not going to try to get the money back from your dad.
- Who was the money repaid to? 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 will not 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 does not have any assets for the trustee to collect, the likelihood of the trustee trying to collect the repayment is low.
Because there are no hard and fast rules about when trustees will and won't attempt to collect repayments that you made to insiders, it is important that you talk with the people who might be affected. While this can be scary, don't panic -- most of the time your loved ones will be happy to help you do what is necessary to get your life back on track. This is especially true if the odds of the trustee trying to collect money from them is low based on the criteria above.
Debtors we have worked with in the past have had success using messages like this one to explain what is 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 am taking steps to get my financial life back on track, and the biggest and most important of these steps is eliminating my debt by filing bankruptcy. 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 is a chance that the trustee may take a portion of that back from you to repay the other people I owe money too. 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 is 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 will no longer 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!"
Upsolve will help you ensure that you have the best chance of getting a fresh start, but it is 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 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 their 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 is 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 are here to support you if you need any help.