If you owe money to friends or family members you’re hardly alone. Nearly 60% of Americans have lent monet to friends or family members.
Yet if you don’t handle these debts correctly upon filing for bankruptcy you can end up in a lot of trouble.
Here’s what you need to know.
Friends and Family Members Are Called “Insider” Creditors
An “insider” creditor is any creditor the court knows you have incentive to favor over other creditors. Family members and friends aren’t the only creditors who can be designated as insiders, but they are the most common.
Bankruptcy courts look at your past payment history to creditors. They look at unusual payments to non-insiders for 90 days prior to filing, but they look at unusual payments to insiders for a year prior to filing. They are looking for signs that any creditor is getting special treatment.
If they find that special treatment, they can sue the lender. That means your family member could get sued as the court “claws back” money they’ve perhaps already spent. You won’t do them any favors.
If the payment is routine: perhaps you rent a house from a family member and made your rent payments, or made all your regular payments for some time before giving up and filing for bankruptcy, then the payment may be safe. Yet you’ll want to go over the entire payment history with your bankruptcy lawyer before any decisions at all are made.
All Creditors Must Be Treated The Same Way
All creditors must be listed on your bankruptcy schedule, regardless of your relationship with them. You cannot expect to hide your debt to a friend or family member from the courts.
It may be embarrassing to tell them that you need to file for bankruptcy, but honesty is the best policy. Be prepared for questions. They may be worried you’ll never pay them back, or angry with you. Reassure them that you can pay the debt back voluntarily after the bankruptcy is discharged, and that you plan to do so. This is something you can do for any creditor (it’s called reaffirming a debt) and so it is not showing them special preference to reassure them of your plans.
The Courts Might Not Treat This Debt As Debt
Strangely, though you must list the debts on your bankruptcy schedule, the courts won’t necessarily pay back your friends or family members for you. This is true whether they’re selling your assets in a Chapter 7 or putting together a payment plan in a Chapter 13.
Much will depend on whether or not the debt comes with a formal promissory note. Without that note, the courts will treat the debt as a gift when it’s time to start repaying creditors, despite making you list the debt and despite looking hard at any payments you made on it.
This may make it doubly important for you to reaffirm the debt in order to preserve relationships with your family members or friends.
Get Help Today
If you have debts to family or friends you must reach out to a bankruptcy attorney before trying to file. The truth is that these debts are red flags to courts. They start looking hard for transfers of property and even innocent financial moves can cause problems. You’ll want guidance on your next steps long before you touch a bankruptcy schedule.
Having financial problems? Want a fresh start? Reach out to Labayan Law today.