How Are Debts to Family Members and Friends Handled During Bankruptcy?

31% of Americans say friends or family members owe them money. 40% of American households have serious financial problems. It’s inevitable that these two facts will clash sometimes. 

Owing money to family members and friends can be draining, emotional, and heart-wrenching…especially when you know you’re going to have to file for bankruptcy. It’s very easy to mishandle these debts in a way that gets you into trouble, and it’s very easy to misunderstand what’s going to happen with them.

Here’s what you need to know.

Bankruptcy eliminates family member and friend debt too.

All but a very limited list of debts are eliminated in bankruptcy. You must list these debts when you file and they will be unable to take legal action against you during that time. 

This tends to worry filers and family members alike, but it doesn’t have to. You can do the right thing later (see below).

You should never try to pay off family members and friends prior to filing for bankruptcy.

Attempting to pay back your family members or friends prior to filing bankruptcy can seriously backfire on both them and you. They are considered “insiders,” and the trustee can actually sue them to get that money back.

Bankruptcy trustees would sue to restore that money from any creditor you gave preference to. The only payments they do not claw back are regular housing (rent, mortgage), utility, and car payments. Once you’ve decided to file you should avoid paying anything other than those regular debts for 90 days prior to doing so. 

The trustee probably won’t pay your family members or friends.

In a Chapter 7 bankruptcy, your assets are sold off to pay off your debts, starting with secured debts like your house or car. In a Chapter 13, the payment plan pays a portion of those debts, but certain creditors are last in line. 

That is because unless your family member or friend put together an official promissory note the courts will act as though your friend or family member gave you a gift.  

You are free to repay the debt after the bankruptcy is finished. 

After your bankruptcy is discharged you can “reaffirm” your debt to your family members or friends and pay them off as you see fit. If there was no promissory note you don’t even have to do it formally. You can just pay them.

If you are worried about their reaction to your bankruptcy filing you can sit down and explain all this to them prior to filing so they understand you are just trying to get your financial life back in order, and that you’re not trying to leave them in the lurch. This should help you preserve the relationship

Get help today.

You should not try to face the bankruptcy process alone. It’s all too easy to make a mistake.

Get help by reaching out to our offices today.

See also:

How to Prepare for Your Free Bankruptcy Consultation

Are You Languishing in the Pre-Bankruptcy “Sweatbox?” 

When Does It Become Absolutely Critical to File for Bankruptcy?


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