Before Bankruptcy — Bankruptcy Rules For Repayment of Family Loans

Things have been tough. You’ve extended your lines of credit. When you exhausted available credit card debt, you borrowed from family members to get by. This is absolutely normal. And when you do have extra money to repay some of your creditors, it’s natural to want to put family first. Your attorney for bankruptcy will caution against this.

If you are considering filing for bankruptcy, it’s important to recognize that there is a look-back period that will be examined by the Trustee. One of the things the Trustee is attempting to discover is whether you have treated all creditors the same. If one creditor has been treated better than another, the payment or payments giving rise to that determination may be treated by the Trustee as a Preferential Payment.

Preferential Payments

One goal of bankruptcy is to treat all creditors equally. As part of achieving this goal, if the Trustee determines that in the year prior to filing bankruptcy you’ve re-paid a family member while ignoring some or all of your other debts, it may give rise to the Trustee ‘avoiding’ the preferential payment. Essentially this means the Trustee will attempt to recover the money you paid to your family member—from your family member—and re-distribute it to creditors, equally.

Treat All Creditors Equally

Don’t be confused by this. All you have to do is make a conscious choice to treat all creditors the same. If you are going to ignore your credit card bills as you approach filing for bankruptcy, avoid all of them. Include loans from family members in this group.

After Bankruptcy

Oddly enough, per the rules of bankruptcy, after the bankruptcy is filed and you have received your discharge of debts, you can voluntarily repay any debt that was dismissed as part of the bankruptcy. While this comes as a surprise to many of my Charlotte bankruptcy clients, it’s a pleasant one. It means that as you approach your filing, you (or your lawyer) can explain to the family member(s) that they may receive a letter about the bankruptcy filing. You can also tell them during this call, that you have the right to repay them after the bankruptcy is over.

Get The Facts

Reach out today to talk to an attorney in Charlotte, NC about bankruptcy. Email me HERE or call me at 704.749.7747 to discuss your situation—including loans to family members, rights against collection agencies, or any other debt-related matter.