The basic law as stated in the bankruptcy code (and in many state laws as well) is that anything repaid to a relative or other “insider” within twelve (12) months prior to filing a bankruptcy case can be recovered by the Trustee in that case.    That means that the Trustee can (and, depending on the amounts involved, will) sue that relative to recover the money or property repaid to them during that period.    This is known in legal parlance as a “preferential transfer” and the bankruptcy statute is 11 U.S.C. 547.
The law is the same with respect to any other non-relative creditor, except that for them the lookback period is only 90 days prior to filing the bankruptcy case, so it’s usually easy to wait the 90 days before filing.  But obviously much harder if a relative has been recently repaid.

There is nothing that prevents the repayment of ANY debt AFTER the bankruptcy case is completed, so if you want to repay anyone, just do it after the bankruptcy case is completed, then there’s no problems.   However, I suspect many of you will be reading this blog or obtaining your legal advice after you’ve already repaid them.

Another related issue, which will not be covered here, is simply transferring assets or money to someone prior to filing a bankruptcy case.  In California, any such transfers done without receiving equivalent value in return is considered a “fraudulent transfer” and is recoverable for up to 7 years following the transfer.

In bankruptcy, this is known as a potentially “fraudulent transfer” which can be recovered by the Trustee. Of course, the Trustee must be able to specifically prove a few things in order to prevail. Among these are: 1. The transfer in question took place within 2 years prior to filing the bankruptcy case (In California, this is four years per separate California law); 2. The debtor making the transfer did not receive “reasonably equivalent value” for the transfer from the transferee AND was insolvent at the time the transfer was made, or became insolvent as a result. (insolvency is a term defined usually with reference to the Internal Revenue Code). Or if the Trustee can prove that the transfer was done with intent to hinder, delay or defraud a creditor, then that is a separate ground on which the Trustee can prevail.

There are obviously more complexities to this and you can read more about fraudulent transfers on my webpage, but this should give a warning bell to all those who are considering doing this.

Even if done innocently or involuntarily, any such transfers can be recovered–both inside and outside of bankruptcy–and the value received by the transferee (person who received the asset) can be ordered by a court to be returned.