Filing for bankruptcy is never an easy decision. Although many different factors can impact each consumer’s decision, one common consideration is what will happen to debt owed to friends and family members. Most people who are looking to file bankruptcy often first look for ways to protect personal relationships and pay off those close to them before filing, or simply leave the debt out of the filing.
Unfortunately, these work-arounds tend to worsen the situation, for both debtors and their friends and family who they hoped to protect.
Is Debt to Friends and Family Common?
According to a BankRate survey, 60% of respondents loaned cash to friends or relatives with the expectation of getting repaid. This arrangement went wrong in most cases. Approximately 35% responded that either the relationship was damaged or they lost money or suffered some other ill effects.
This is a big enough problem that many news outlets and personal finance resources offer advice about how to manage loans to friends and family. Many, including LA Times personal finance columnist Liz Weston, advise individuals not to loan more than they can afford to lose – especially to friends and family.
2 Wrong Ways to Address Friend and Family Debt
How you approach and handle family and friend debt is important. Below are three wrong ways to address friend and family debt:
- Not including family and friend debt as part of your bankruptcy filing. You are required to list all outstanding debts, including those owed to friends and family, in your bankruptcy schedules. Those documents will be submitted under penalty of perjury. If you value the personal relationships, it is best to talk with the person you borrowed from before you file.
- Quickly paying off your debt or portions of it before filing bankruptcy. The trustee assigned to your case once you file bankruptcy will look back at all transactions over the 90 days, or one year in the case of insiders, leading up to your bankruptcy filing to see whether anyone got a disproportionate payment. Under the US Bankruptcy Code, the trustee has the power to avoid any transactions that are deemed disproportionate payments to your creditors.
Call an Experienced Central Valley Bankruptcy Attorney
If you are considering Chapter 7 bankruptcy, it is in your best interest to consult with an experienced bankruptcy attorney to help you learn your legal rights and options, especially with respect to Chapter 7 bankruptcy.
For more information or to schedule a complimentary consultation with Central Valley bankruptcy attorney Gurjit Srai, please call 209-323-5558, or complete our online form.