Debts and Bankruptcy

Family Member Debts and Bankruptcy

There are several reasons for taking a loan from family members. Just before bankruptcy or during bankruptcy its quite common to have some loans from relatives, parents, siblings and other family members. The debts have piled up big time and before you file for bankruptcy is there something that you can do with your family member debts? The process of bankruptcy makes you list all your creditors/lenders so that may also include your friends, family members and all lenders irrespective of the debt type. Under chapter 7, if you do not have any non-exempt assets, your lenders might not get anything. The debt hence is written off or eventually settled at a nominal payment.

The Chapter 13 payment plan will focus on prioritizing debts under the Bankruptcy code or rule. Your family members may or may not receive part or any repayment for their debts. In most situations, the unsecured credit is released as 99% of the payment plans do not cover 100% of the debts. To know more about Chapter 13 and Chapter 7 differences, check Recovery Law Group now.

Repayment of debt, problems, and concerns

The debt of family members and friends could be repaid after the bankruptcy situation also. But, the biggest hindrance to that could be potential taxes. Since, the debt is officially done, regarded as bad debt, repayment would be recorded as a gift. This could result in gift tax or some other legal reporting requirement. An individual can gift $14,000 per year an additional cover of $ 5.34 million which can be exhausted over the lifetime. One cannot simply manufacture loans from parents divert money to parents or family members. There is a need for proper documentation and paperwork before listing a person as a creditor before the bankruptcy court.

When you decide to pay off your family debts before declaring bankruptcy, you are not off the hook either. This looks like an attractive option as you might end up paying nothing to your family members and friends during the bankruptcy process. However, this not a great option either. The law and court consider all creditors equally and it focuses on treating all creditors fairly. The bankruptcy trustee tracks all your financial transactions for ‘preferential transfer period’. The preferential transfer period is a bankruptcy term which is a period of 90 days before declaring bankruptcy. The bankruptcy trustee has the right to propose a reversal of any suspicious transaction of over $600 to a particular creditor. This rule prevents a borrower to transfer the debt to one or few debtors.

Exceptions in the preferential transfer period and repayment options

There is also an ‘insider’ term in the bankruptcy procedure. The term ‘insider’ is referring to business associates, immediate family members, friends, etc. The preferential transfer period for such people is one year. The court can claw back any loan repayment of say $10,000 8 months back, that you made to your parents for the bankruptcy procedure. Repaying any creditor or a family member just before bankruptcy is not a crime or an illegal activity. However, they won’t be able to hold that money for long once the bankruptcy procedure begins. Any sort of hidden transactions that include the transfer of assets/properties is illegal and that could certainly block any sort of release of debt whatsoever.

Paying back your relatives, family members and friends can work only in the case of Chapter 7 bankruptcy procedure. The debtor in this scenario loses all his non-exempt assets. Also, the money earned after the bankruptcy process is completed under Chapter 7 is not under scanner as it is in the case of Chapter 13. So, paying off family debt after bankruptcy becomes a great option if Chapter 7 bankruptcy has been applied for. It is quite obvious to have loans from family members before declaring bankruptcy and everyone wants to payout their family first before all creditors. We can provide professional help to solve your bankruptcy woes legally. Just call +1 (888) 297 6203 to address all your questions and concerns.


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    2019-07-11T10:37:46+00:00