Legal Question in Bankruptcy in Arkansas

Re: How can they sue family members for

The bankruptcy law has always had a period of time built in that the Trustee in Chapter 7 can "look back" to to find transactions that may prefer one creditor over another. This prevents one creditor from getting paid off at the expense of all the others. This "look back" time period is finite; the Trustee cannot look back forever. It is, though, longer than 6 months.

Your issue has nothing to do with the existence of a contract: the issue is a combination of that lookback period and a family member being involved with lending you money (an "insider" results in a longer lookback period). Your sister, who is not a bank working under banking regulations, made you a loan and you paid her back like a good sibling should. She's an "insider." Your sister lent you the money because she's your sister. The loan and its repayment are not arm's length transactions.

Any deal wherein one creditor is paid back before other creditors (a "preferred" creditor) is not fair to all creditors. Look at it this way: If a debtor paid off American Express and not Visa, then filed for bankruptcy protection under Chapter 7 within the lookback period for that transaction, the Trustee would look back, see the transaction and sue American Express to reclaim that preferential payment to benefit all the creditors.

It's harder to see this when the lender is family, but the exact same rule applies. The Trustee will look back, see the transaction and sue the creditor (in this case your sister, which, because she is a relative and therefore an "insider," lengthens the lookback period that the Trustee has) to reclaim that preferential payment that you made to her to benefit all the creditors. This leads to lots of family friction, I can tell you.

There is a way to work around this. I'll let your lawyer talk to you about bankruptcy planning.

Speaking of lawyers, DO NOT TRY TO NAVIGATE THE NEW BANKRUPTCY WATERS WITHOUT AN ATTORNEY!!!!!!!!!!!!!!! Bankruptcy is, since the 2005 Bankruptcy Abuse Prevention Act went into effect, full of sinkholes to entrap the unwary debtor and leave Debtor worse off than s/he was before filing.

THE INFORMATION PRESENTED HERE IS GENERAL IN NATURE AND IS NOT INTENDED, NOR SHOULD IT BE CONSTRUED, AS LEGAL ADVICE. THIS POSTING DOES NOT CREATE ANY ATTORNEY-CLIENT RELATIONSHIP BETWEEN US. FOR SPECIFIC ADVICE ABOUT YOUR PARTICULAR SITUATION, CONSULT YOUR ATTORNEY.