Can I pay Back my Family Members Before Filing for Bankruptcy in Georgia?

Clients in my Atlanta, Georgia practice often ask if they are allowed to pay back informal loans to friends and family prior to filing for bankruptcy. The desire to do this is completely understandable. Often friends and family are the first people we turn to in the face of a financial crisis. They are often willing to help us and they are also the first people that we want to repay. After all, they are family. However, there may be a problem with paying back informal loans prior to filing for bankruptcy.

The problem with paying back friends and family members prior to filing for bankruptcy is that, under the bankruptcy process, all creditors must be treated fairly and equally. Your Uncle Bob and the hospital that treated your heart attack are on equal footing under the law. The bankruptcy court must prevent either a preference or a fraudulent conveyance. So, you are not allowed to pay back family members in preference to other creditors. That means that you are not allowed to pay them back first and fully, while the other creditors must wait during the bankruptcy process or have the debt owned them discharged entirely. Paying back family members first violates the rights of all the other creditors.

In the context of family, a fraudulent conveyance commonly involves selling an asset for a grossly inadequate price with an informal agreement to buy back the property for the same price after the bankruptcy proceeding has concluded. This practice is not allowed. Another common conveyance involves selling cars. If you do, for example, sell a car to a family member, make sure that you charge the blue book price and formally record the sale and title transfer.

The Bankruptcy Trustee can look back two years to ascertain whether either of these forbidden practices has occurred. If the Trustee sees that you have paid back a family member in preference to another creditor (or you have fraudulently conveyed property) they can file a lawsuit against the family member who you paid you! The Trustee can then reclaim the money or property on behalf of all the other creditors. By not paying back family members improperly, you are saving them the expense and hassle of a lawsuit.

It is also important that you list all debts owed to family members in your bankruptcy filing. Doing so will ensure that the debt is legally discharged. That said, there is nothing to prevent you from paying back friends and family in full AFTER the conclusion of the bankruptcy proceeding.

If you are in debt and considering bankruptcy, please consult a qualified bankruptcy attorney. For a free initial consultation, contact The Law Offices of Charles Clapp at 404.585.0040.