Another Problem with Borrowing Money from Family

During the holiday season families get together and enjoy the season and family togetherness.  This is a time to hope and dream, and for many of us hope includes a better financial future, or a new business venture.  When a member of the family is struggling financially, or has big dreams that are bigger than their wallet, they often ask their family to help with a loan.  You can find a lot of reasons to avoid loaning money to, or borrowing money from family, but in case you do not have enough, here is one more.  Bankruptcy.  When you are considering bankruptcy you often consider whether there are things that you can do prior to filing bankruptcy to make it easier on you and your family.

Paying a family loan prior to filing bankruptcy could be a problem.

In bankruptcy all unsecured creditors get treated equally, even family and friends.  If you give “unfair” treatment to creditors who are family and friends  prior to filing bankruptcy, the trustee can undo the payments you make, which means the trustee may require your family return the loan payment, and it will go into the bankruptcy where all creditors can get an equal piece of the money.   When you owe money to family you may be tempted to “not include them in the bankruptcy.” One of the requirements of filing bankruptcy is to list all of your debts and all of your assets.  You are also required to take an oath that you have listed all your debts.  The consequences of lying under oath are serious.   If you include your family in your bankruptcy the debt to the family will be discharged legally, but you are free to give them money after your file bankruptcy.  These payments would be legally considered a gift, but the bankruptcy discharge does not prohibit you from giving money away, it only prohibits creditors from demanding your money.

If you are going to borrow money from family or friends there are ways to structure the transaction to protect it in bankruptcy, but this usually needs to be done when you receive the money, not just before filing bankruptcy.  If you are considering borrowing or loaning money to friends and family this holiday season I recommend you speak with an experience attorney regarding the consequences, and how to protect yourself and the ones you love.  If you are considering filing bankruptcy and you owe money to family and friends, you should speak with an experienced attorney to prepare without creating problems for yourself or your family.  The Carroll Law Firm can help you will all these needs.

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