Payments to a family member pre bankruptcy

mintcondition

I had been in a DMP for a few years until Autumn. The debts related to when I ran a business a few years ago and I've been trying to pay everything off. I had paid off about 40% of the debt in total by the time my DMP ended.

I sold my house earlier this year (I wanted to move nearer to my family) and from the sale I used half of the net proceeds (about £5k) to pay some money back to some family members I had borrowed.

I used the remaining money from the sale to supplement my income over the course of this year. However, earlier this month I petitioned for bankruptcy. I decided this was the best option as my income has dramatically reduced from where it was two years ago and I have no spare income to put towards the DMP.

I made this decision reluctantly towards the end of the summer (I did not consider it as an option at the time my house was sold - something I have stated on my statement of affairs and would happily say under oath). Also, before making myself bankrupt I did make an offer to my creditors based on money that my family were prepared to give me to avoid bankruptcy, but one of the creditors refused.

Having now made myself bankrupt, the OR considers the payments to my family to be a preference payment.

In my opinion these were not preference payments made in anticipation of my becoming bankrupt, as it was not my intention to do this at the time the house was sold. Also, I carried on paying my DMP for seven months after making the payments to my family. I also never included my family in the DMP payments that I made to creditors over 3 years when I paid off 40% of the debts.

The OR now intends to write to my family members to ask for this money back and I feel this unfair as I do not consider the payments to be a preference. However, I know s340(5) seems to suggest the law presumes payments to family members are in preference.

Does anyone have any advice on whether payments made in these circumstances are likely to be considered preference payments?

Thanks for any help.

D

JCS1

Under insolvency law, all creditors, regardless of whether they are a family member, bank or credit card company should be treated the same.

If you had taken the £5k from the house proceeds and split this on a pro-rata basis amongst all your creditors then that would be fine.

Was there a reason that your family loan was not included in the DMP? How much of the loan was cleared with the £5k payment? What was the timescale inbetween making the payment and declaring bankruptcy?

paddedjohn

The OR can write to your family asking for the money but AKAIK there is no obligation on them to give anything up.

fermi

paddedjohn wrote: »

The OR can write to your family asking for the money but AKAIK there is no obligation on them to give anything up.

The OR/trustee can make an application to the court to make a judgement "restoring the position" to that which existed before. i.e. that orders repayment.

That judgement would be enforceable against the persons who received the preference.

Saying that....

mintcondition: Are we talking about £5K to one person here? Or spread out over several?

The OR has a policy of (generally) not taking legal action to enforce repayment of preferences etc where these are less than about £5K.

So while the OR may "ask" for this to be paid back, it's possible that if the people who received it refuse or cannot afford repayment, then the OR may choose not to seek legal recovery though their solicitors.

There is some info on the IS site about preferences and recovery. I'll find a link.

Answers to JCS1's questions are also needed.

mintcondition

Hi

Thanks for your messages.

The money that I paid back to family members was less than £5k in total. I paid back money to three people (each person was less than £2k), which in effect was all the money that I felt I owed them. I paid them the money at the end of Jan 2011 and was declared bankrupt at the beginning of Dec 2011.

I'd borrowed the money for different reasons.

One was money that someone had been giving to me ad-hoc over 18 months so that I could afford to eat better while in my DMP and also so I could go on holiday. That person wouldn't have even considered it a loan, but I felt that I should pay the money back as I had the money at the time of selling the house.

Another was a loan someone had given me about 18 months before I declared myself bankrupt to cover a self assessment tax bill. Again, the family member was not desperate for me to pay them back at that time, and they were happy for me to concentrate on paying my other creditors. Again, once I had the money from the house sale I felt I should pay the money back to them.

The last one was money someone had given me only to cover some costs that I had as a result of selling my house (because I hadn't yet got the sale proceeds), so I suppose there was an expectation this money was a very temporary arrangement.

My family care for me and wanted to help me out. They would never have expected to be included in my DMP. Again, I can only emphasise what I said earlier which is that at the time of paying the money to my family I was still in the mindset that I would pay off all my debts eventually (either by completing the DMP or getting to a point where F&F settlements could be accepted). However, over the course of the summer my mental health deteriorated with the prospect of how long it was going to take on my reduced income and after making an offer to the remaining creditors (which in total meant that they would have got 60% of the debt back) which they refused I opted for bankruptcy in December.

Hope that all makes sense. Thanks again for the advice.

fermi

Have a careful read through how the OR approaches things here:

http://www.insolvencydirect.bis.gov.uk/freedomofinformation/technical/TechnicalManual/Ch25-36/Chapter31/part4A/Part%202/Part%202.htm#31.4A.27

Key things I would point out might be:

- For preferences to connected parties/associates/family, the OR can look at payments up to 2 years prior to the bankruptcy.
- A desire to prefer in those circumstances is presumed unless it can be shown to be otherwise.
- "Where the amount to be recovered is less than £5,000, it is unlikely to be worth the cost of action other than entering into correspondence with the beneficiary requesting payment."

mintcondition

Thanks for the link.

I suppose what I'm not sure on is how you can prove that a payment wasn't made with the intention of then going bankrupt. I'd really like to be able to show that it wasn't a preference and avoid my family getting dragged into it all, when all they've ever done is tried to help me.

Anyhow, I'll look into the OR approach and see what that implies, thanks for all the tips.

D

debtinfo

Lets think of this another way, what changed in your financial situation between when you sold the house and paid your family, and when you filed for bankruptcy that changed it from being in a position to pay creditors to one where you couldnt any more