You got a large chunk of money and paid the loan from your Mom or other family member and now are ready to file bankruptcy. Or you have a high balance in bank accounts prior to filing a bankruptcy so you are going to take the money out and pay back a loan to a family member right? Wrong. There is a section of the bankruptcy petition where these sorts of payments must be specifically listed. You are going to disclose them on your petition but the money is already gone anyways so nothing the trustee can do about it right? Wrong again.
The bankruptcy petition asks about these sorts of payments to insiders for the reason that they can do something about it. The section of the petition that is dedicated to these sorts of payments is known at the Statement of Financial Affairs. The Statement of Financial Affairs requires that you list any payments to family members or friends in the past year. In addition to listing that the payment was made, you must also list the name and address of the person the payments were made to, the amount(s) of the payment(s) and the date(s) of the payment(s).
Why do you have to list this information? These payments are known as insider payments or preferential payments. The trustee can reverse any payments made to insiders. However, you can avoid the trustee from contact your family member and taking the money from them. You can settle with the trustee yourself sometime for a fraction of the amount paid to your family member. Sometimes the trustee will even allow you to pay the preferential payment amount to the trustee over several months in some sort of payment plan. What if you do not want the trustee to contact your family member but you need more than a few months to pay the money to the trustee? You can pay the amount to your unsecured creditors over the life of the bankruptcy through a Chapter 13.
So what do they do with money when they collect it back from your family member or receive the money from you? The trustee notifies your creditors that asset with be recovered and given them a chance to file a proof of claim with the court. Once the deadline to file proof of claims has passed, the trustee disburses the money on a prorate basis to your creditors.