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Paying Back Loans Before Filing


A: If you pay your brother that $650 you owe him a week before filing, you may experience a legal problem. According to bankruptcy regulations, any debt repayment you make within the year prior to filing for bankruptcy can be reversed by your bankruptcy trustee so that the trustee can distribute the money equally to all of your creditors. The reasoning behind this rule is that the debtor should not favor one creditor over another. The rule does not apply to regular debt payments in the ordinary course of business, for example, your monthly mortgage or car payment.

We often hear the question in these situations: How does the trustee will find out? The trustee finds out from you because you have to state on your bankruptcy petition whether you paid friends or family members (insiders) anything within the last year. At the trustee's meeting the trustee will ask you the question again. Not telling the truth to hide transfers and assets, would be a federal felony. No money is worth committing a federal crime. 

This applies to non-family debt repayment as well. If you pay a creditor who is not an insider within 3 months before filing of the bankruptcy petition, the trustee might be able to avoid the trunsfer if the it was made not in the ordinary course of your business, for example, you pay off one of your credit card accounts.

If your trustee avoids a transfer, it does not create the situation before the transfer happened when you possibly were able to apply exemptions to the property you transferred. If the tansfer is avoided, you can't apply exemptions anymore.  Your bankruptcy attorney St. Louis MO Tobias Licker offers a free consultation for more information about any question that cannot be answered through the general answers on this website.

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