What is the court going after a friend I paid back? Preferences and fraudulent transfers in bankruptcy
A common fact scenario in bankruptcy is where a client says they are ready to file bankruptcy as they have just paid back their family member a large sum of money. As a client, you are ready to file, but as an attorney your wish you could have met the client prior to that payments. Why is that?
Payments made within 90 days immediately preceding the bankruptcy on a debt to a regular creditor and 1 year before filing to an insider (think friend or family members) can be recovered by the court and used to pay your other creditors. So the large payment to the family can be ‘clawed back’ from the family member and used to pay your debts.
In other cases, the court can look back in Oregon up to 4 years for transfers of other certain properties, and in extreme cases, 10 years if you put all your property in a self-titled trust.
These rules are called preferences and fraudulent transfers. In essence, the bankruptcy rules recognize you want to pay certain creditors over others, and they’ve built in a time frame to go back and prevent this if it does occur.
It is absolutely critical you completely disclose any recent payments and transfers to your attorney. These transfer and payments must be listing in your statement of financial affairs.
Often times, there are things that can be done to fix this situation before filing. In Oregon, there is a process where the debtor may be able to recover the payments before filing and protect the family member. If this will not work, it may be possible to get a better result in a different Chapter of the bankruptcy. In any event, you must disclose the transfers.
Make sure you thoroughly go over any payments to friends or family, including out and out transfers of things like vehicles or real estate, in the years preceding bankruptcy.