If you are about to file chapter 7 in Houston, or really anywhere in the U.S., don't repay the money that you owe to a friend or relative. If you do, you may be putting them in hot water.

A chapter 7 bankruptcy trustee is a "liquidation agent" whose job is to collect any and all money that they can from you (that has not been claimed as exempt) and pay your creditors as far as money will go. So they are given "strong arm" powers under the Bankruptcy Code, to recover certain payments that you have paid, particularly to "unsecured creditors."

So, if you have paid one of your unsecured creditors a payment during the 90 days before you filed bankruptcy, or you paid an "insider" (i.e. can be a relative or in certain circumstances a friend) during the 1 year before filing bankruptcy, the trustee can sue your creditor or your relative or friend to get that money back, and then the trustee distributes that money equally among all of your creditors.

We had a case recently where a client had repaid his uncle $20,000 right before filing bankruptcy, and our client did not want uncle to lose the money. Our client will just have to wait for a year, to file bankruptcy. Or, he could somehow repay the trustee himself (or repay the uncle later, if the uncle has to pay it). Another option would be for the client to file chapter 13, and repay $20,000 to his unsecured creditors under his plan. In such as case, the uncle would not have to pay it back.

But keep this in mind, if you are about to file bankruptcy, don't make these "preferential payments," or you could find your relatives and/or friends being sued by a bankruptcy trustee.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization