Preferential Repayment Of Parents' HELOC Loan

If a debtor repays a prior unsecured loan to another family member within one year of filing bankruptcy the trustee can recover the repayments from the family member as a preferential payment. Debtors are not permitted to prefer family members over unrelated unsecured creditors.

A prospective bankruptcy debtor stated that his parents used a home equity loan secured by the parents’ primary residence to borrow money to pay the debtor (their child) living expenses while he was looking for a job. The debtor did not sign a promissory note to the parents. The debtor found a job and started making the payments on the parents’ heloc loan. The debtor asked whether his payments to his parents’ lender are preferential repayments of an unsecured loan to his family members, or whether the payments are simply payments of a secured debt outside the scope of the preference statutes.

Although the home equity line of credit is a secure debt, it is not the debtor’s secured debt. In my opinion the debtor’s loan to the parents is an unsecured loan. It does not matter where and how the parents got the money to make the unsecured loan to their child. Repayment of the parents’ loan is a preferential repayment of an unsecured loan even though the debtor is writing checks to the parents’ home equity lender. I think a bankruptcy Trustee could go after money paid to the parents’ heloc lender within one year prior to a bankruptcy filing.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida