Don’t do what Michael Vick did in his bankruptcy (don’t give money away to your relatives and friends before you file).

Michael Vick filed for chapter 11 bankruptcy in July 2008.  But the problem appears to be that prior to his filing of bankruptcy Mr. Vick allegedly gave $2 million to family and friends.  The Trustee in his case is seeking reimbursement from his mother, his fiancée, his brother, and other friends and relatives.  Therefore the people who received the money will be asked to return it to the trustee for distribution to his creditors.

Mr. Vick had 20 million dollars in debt when he filed chapter 11.  Apparently he can keep $300,000 of his 5 million in salary with the rest going to his creditors.  There are no fraud allegations in this case associated with the improper transfers but the Trustee is demanding return of the $2 million.

The problem for Mr. Vick is if his friends and relatives have spent and or invested and lost the money (that they have allegedly received) then how will they then return it to the Trustee?  The Trustee will probably take payments but what if Mr. Vick’s friends and relatives have little or no money to make the payments?  Mr. Vick now has an income of only $300,000 a year to pay for himself so he probably can’t help all of them return the money.

In a chapter 7  bankruptcy the law that allows the Trustee to demand this is the preference law contained in section 547 of the bankruptcy code. ( Mr. Vick filed a chapter 11 bankruptcy which is different and far more complicated than the simpler chapter 7 that most people file). This section 547  basically states that if you make a payment within 90 days to a non-insider while you are insolvent then the recipient of the money could be asked to return it to the trustee for distribution to the creditors.

If you make a payment to an “insider” then the trustee can look back one year for such transfers and demand the money back.  An insider is a close friend or family member.  These are exactly the people who Mr. Vick transferred this $2 million dollars to.   The transfer is essentially considered a “fraudulent conveyance”.

My bankruptcy clients in a chapter 7 often mention that they need to pay a relative or friend back for some loan that this person had given them before they file for bankruptcy.  I have to warn them as I do here that this is not a good idea and that the trustee in their case can ask for the return of the money to the estate just like they asked Michael Vick.  In my cases the amounts they want to transfer are a lot less but it is not allowed nonetheless.

Always inform your attorney of these transfers and if you have not paid the money back yet then don’t do it.  You can pay these friends and relatives back after the bankruptcy.  You can pay them out of exempted funds that you are legally allowed to keep in the bankruptcy or you may pay them over a period of time out of your post-petition regular income.  There is no prohibition against paying these people back after bankruptcy but it must be done correctly or your friends and relatives could be asked to pay the money back to the trustee like Michael Vick’s were.

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