Expert: Mark J. Markus- California Bankruptcy Attorney - 9/16/2008

Question
I moved back to my hometown in Herrin, IL in October, 2007.  My FL house was on the market for a year and a half w/o any lookers. Went into foreclosure in Feb, 2008. Prices have dropped by $200,000 in a short time in FL.  R.E. market a mess there.  I was out of work for 1-1/2 years but was applying the whole time.  When I applied for food stamp here in IL, I was told I could cash in my 401K acct. (about $25,000).  I wasn't aware I could access these funds.  I cashed in these funds (got about $20,000 after taxes withheld).  I lived off of these funds for several months until I got a job recently.  I paid back emergency loans to family members ($3,000 to brother, $1200 to sister & $500 to mother for moving/emergency living expenses).  The bankruptcy trustee here in IL asked my bankruptcy atty. to research the "family priority" rule on repayment.  My IL atty. told me he researched FL law & found that it was based on the liberal Fed. law regarding retirement funds.  Now the bankruptcy trustee is saying my relatives might have to repay the funds I gave them back.  I relied on my attorneys' advice & don't want to see my relatives penalized for loaning me funds in my emergency times.  My sister, in particular, doesn't have funds to pay back since she borrowed from her credit card & can't sell her FL home either.  Any advice will be appreciated.  Thank you.

Answer
I have no idea what Illinois' law is regarding repayments of loans to family members, but under the federal bankruptcy law, any repayment of a loan to a relative within 12 months prior to filing the bankruptcy case if you were insolvent at the time the repayment was made.  This is set forth in 11 U.S.C. 547(b), known as the "preference" statute.  (You don't say when your bankruptcy case was filed in relation to these repayments, but I assumed it was within one year.  If it was more than one year, the Trustee may also be able to recover under a fraudulent transfer theory, but that would be more difficult to prove.

In most cases, the Trustee's will settle for less than the full amount, in order to avoid litigation costs.  You need to have your attorney (or another attorney in your area) fully review all aspects of the case before making a decision, but those are my thoughts given the facts you presented.