Bankruptcy laws, like all laws, attempt to be fair (I admit not all laws actually are fair). In an effort to be fair to all creditors a bankruptcy debtor may not pay off one creditor in favor of another. In other words your relative cannot get all the money back you owe them and your credit card companies nothing.

Many times a bankruptcy debtor owes money to a relative and instead of listing the relative in the bankruptcy filing they pay off the loan before filing.

If this happens your case trustee or a creditor could bring a “Preference Action” against your relative in order to get back the money you paid them. This means that your relative will be sued in the bankruptcy Court and forced to repay the money.

Repaying Small loans will not likely result in a “preference action” against your relative. Also, after your bankruptcy case is over you are free to repay any creditor, including your relative.

Many times when facing insolvency issues a debtor, either a business or individual, will look to pay one creditor over another, this is called a preference. If the payment was not in the ordinary course of business and the transaction occurred within the 90 days prior to the date of filing the bankruptcy case, then the preference is likely avoidable.

For businesses this may be paying a large sum to creditor, such as a supplier whom you want to repay in full before filing. For individuals this may be a large payment to a family member.

If this has occurred the case trustee or another party in interest may be able to force the creditor to return the payment to your bankruptcy estate. Then the case trustee will distribute the non-exempt funds to your creditors’ pro-rata.

If you have made a large payment to a creditor prior to filing bankruptcy you should discuss this situation with your attorney.