Can I sell my car to pay my brother back for a loan that he made to me and then file bankruptcy after?

Asked on August 21, 2013 under Bankruptcy Law, Ohio


M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

You shouldn’t try to repay “insiders” (i.e relatives or close friends) before you file because the bankruptcy court has the power to “avoid” (i.e. reverse) these payments. This means that if you repay your friends or relatives, they may have to give back the money (where it will be split up among all the creditors owed). In bankruptcy this is known as a “preference” because the payments were made to creditors that you may have preferred over others. While not in and of itself fraudulent (since it is a payment made to someone for a valid debt), it favors the creditors who were paid. Specifically, payments made to “insiders” within 1 year prior to filing are at risk (while there is a 90 day look-back for payments made to non-insiders).

That having been said, if you want to wait until your bankruptcy case has been discharged you can pay back any creditors that you want, including your friends or family, without worrying that the court will ask for it back.  

Bottom line, before taking any action of this sort, you need to discuss it with your attorney.  

Note: Not all pre-petition payments are preferences.  For example, mortgage and car payments, ongoing rent or utility payments, and regular payments on some types of loans incurred in the ordinary course of business.

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