You’ve had a lot of financial ups and downs over the years, and your parents have been there to support you along the way. When you were struggling financially because of changes in your employment over the last couple of years, they lent you some money.
Unfortunately, you couldn’t pull things together in time to avoid bankruptcy. You hate the idea of listing your parents as your creditors and lumping that bill into the rest of your debts. Can’t you just hurry and repay them before you file Chapter 7?
That would be a preferential transfer
The bankruptcy courts exist to keep things fair – for both the debtor and their creditors. For that reason, the bankruptcy trustee will carefully scrutinize payments that were made to creditors at least 90 days prior to a bankruptcy filing. In the case of “insiders,” like your parents, that scrutiny will go back a full year.
The goal here is twofold: The scrutiny is designed to keep debtors from intentionally favoring certain creditors – like friends and family members – and to keep creditors who start to realize that a debtor is heading for insolvency from pressuring for payments in order to better their own position.
If you do repay your parents, the bankruptcy trustee can require them to turn the money back over to the court – and that’s far worse than being listed as a creditor in your proceedings.
Generally, the best solution to this problem is to talk to your parents about the situation before you file for bankruptcy. Experienced legal guidance can also help you better understand your choices.