Can money paid to a family member be retrieved by the trustee?

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Can money paid to a family member be retrieved by the trustee?

We filed Chapter 7 at the end of 09/10 in VA and have been told that the money we borrowed 2 years ago and then paid back to a family member in 01/10 (as per our contract with them) needs to be paid to the court. And that the trustee of the court gets a percentage of everything he collects. Is this correct?

Asked on October 30, 2010 under Bankruptcy Law, Virginia

Answers:

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

Answered 10 years ago | Contributor

Yes.  A Chapter 7 bankruptcy is a liquidation, so a trustee has the ability to sell assets and distribute the resulting cash to creditors (less a percentage and administrative costs). But the trustee has other powers, as well.  Since one of the goals of a bankruptcy is equal distribution of assets, all creditors share equally in available assets. Therefore, the bankruptcy code has a number of provisions designed tofrustrate attempts by debtors to disrupt the equitable distribution. One of the most important of these are the preference provisions.

A preference is a pre-bankruptcy transfer that has the affect of paying one creditor more than that creditor would have received if the transfer had not been made. One of the things that is disclosed in a bankruptcy filing is whether any payments or other transfers were made shortly before filing. A trustee has the right to make demand for the return of such assets (the trustee also has the ability to file a civil suit and obtain a judgment for a preference), regardless of the intent of the parties. Therefore, a trustee does not have to prove that the debtor was trying to unjustly improve the position of the creditor. If a payment or a transfer has the effect of improving one creditor’s position relative to other creditors, and no defenses exist, the trustee is entitled to recover the value of the transfer.

As a general rule, a preferential payment to a third party is one that occurs within the 90 days prior to bankruptcy. Additionally, any payments made within a year before bankruptcy to “insiders,” who are generally business partners, family members, and the like, can be set aside as preferential.  Since this "preference" has already been made, you should consult with an experienced bankruptcy attorney who can assist with damage control.


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