Following a Chapter 7 bankruptcy, you may repay any debt you choose regardless of the fact that it has been formally discharged in bankruptcy. Therefore, debtors with outstanding debts to friends or family-members for personal or other types of loans do not lose the ability, first of all, to repay those loans. The bankruptcy affects only that friend or family member’s ability to collect on the debt short of the debtor’s voluntary repayment of the debt. Prior to the filing of the bankruptcy, however, such repayments, in certain cases, may affect a debtor’s ability to file for bankruptcy within a desired timeframe.
Many debtors wish to pay off personal loans entirely so as to maintain a good personal relationship with the friend or family-member who made them the loan. It is not generally the case that these sorts of outstanding debts are those that have driven the debtor to consider bankruptcy in the first place. Rather, they are often secondary steps taken to avoid bankruptcy or other drastic actions in the face of the general hardship of a job-loss, medical situation, or divorce. Someone did them a favor, in other words, and they are reluctant to appear to be biting the hand that fed them.
Nevertheless, as I’ve written elsewhere on this blog, prior to the filing of the bankruptcy petition, there is a 90-day period of time known as as the “preference period,” in which any payments larger than $600 made to any one creditor are scrutinized by the court-appointed trustee overseeing the bankruptcy case to determine whether a “preferential transfer” has been made. Such “transfers” are those that “prefer” one creditor over another, and, if the trustee has determined that such a transfer has occurred, he or she may reclaim those transferred funds and/or dismiss the bankruptcy case entirely.
When a payment of this sort has been made to an “insider,” the preference period is much longer. An “insider” is classified, basically, as a friend or family-member, among other things. Any payment over $600 made to an “insider” within one year of the filing of the bankruptcy petition may be considered a preferential transfer.
Thus, if you have an outstanding personal loan that absolutely must be repaid before filing for bankruptcy, it may mean holding off on filing your petition for an entire year. In individual cases, there may be good reasons to elect to make this repayment and delay filing for bankruptcy for that amount of time; in other cases, it may be better to simply file and “voluntarily” repay the loan in smaller incremements after the bankruptcy discharge is granted.
If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.
