What happens to money you owe family and friends when you file bankruptcy?

Can you pay back family before bankruptcy?

You can, but the trustee may be able to take the money back. Bankruptcy tries to treat creditors of the same kind alike. A trustee may undo a payment you made to a creditor on an existing debt, while you were insolvent, if it gave that creditor more than it would receive in a Chapter 7 case. This is called a preference.1

How far back the trustee can look depends on who was paid.1

For an individual, the law's list of insiders includes relatives: people related by blood or marriage within the third degree, and step or adoptive relatives within that degree. The list is not written as a complete one, so whether a close friend counts depends on the facts.2

When a trustee undoes a payment, the trustee may recover the money, or its value, from the person who received it. In other words, the relative you paid back can be asked to hand the money over.3

Being able to pay at the time does not settle the question. For a preference, the law presumes you were insolvent during the 90 days before filing. For older payments to a relative, insolvency on the date of the payment still has to be shown.1 11

There is a floor for small payments. In a case filed by an individual whose debts are mainly consumer debts, the trustee cannot undo a transfer when the property involved is worth less than $600 in total. That figure is written into the statute and is not one of the amounts adjusted every 3 years. Other exceptions exist too, and whether one fits your payment is a question for a lawyer, ideally before you make it.1 11

You cannot keep these payments quiet. The statement of financial affairs asks whether, within 1 year before filing, you made a payment on a debt owed to an insider. It also asks about payments that benefited an insider, including payments on a debt an insider guaranteed or cosigned.12

What about giving or selling property to a relative before you file?

That falls under a different and stricter rule. A trustee may undo a transfer made within 2 years before filing if you received less than reasonably equivalent value for it while insolvent, or if it was made with actual intent to hinder, delay or defraud a creditor. Handing a car to your brother, or selling it to him cheaply, can be reached this way.13

The risk is not only losing the property. A court may deny a Chapter 7 discharge altogether if you transferred or concealed property with intent to hinder, delay or defraud creditors.9

Do you have to list a loan from a relative or friend?

Yes. A debtor must file a list of creditors, and the law makes no exception for people you are close to. A debt counts whether or not there is a written agreement, as long as the person has a right to be paid.6 7 2

Leaving someone off does not protect them or you. A debt that was not listed in time for the creditor to file a claim can be excepted from the discharge, unless the creditor knew about the case in time.6 7

At the meeting of creditors, you answer questions under oath about your paperwork, your debts and your property, so the list needs to be complete.14

What happens to the debt in Chapter 7?

It is discharged with your other debts from before the case, unless one of the listed exceptions applies. After the discharge, the person may not take action to collect the debt from you personally.4 5 10

What happens in Chapter 13?

A loan from a relative or friend is an unsecured claim in the plan. The plan does not have to pay unsecured claims in full, as long as you commit your projected disposable income for the plan period and unsecured creditors get at least what a Chapter 7 liquidation would pay them.8

You cannot simply pay your family in full while other creditors get less. A plan may group unsecured claims into classes, but it may not discriminate unfairly against any class. Whether a particular arrangement is unfair is for the court to decide.15

What if a relative co-signed one of your debts?

That is a different situation from owing the relative money. Your discharge does not change what a co-signer owes. The lender can still collect from them.10

Chapter 13 offers some protection while the case is open. Its codebtor stay generally stops creditors from collecting a consumer debt from a person who owes it together with you. A Chapter 13 plan may also treat a co-signed consumer debt differently from other unsecured claims.8 15

Can you pay them back after bankruptcy?

Yes. A debtor who has received a discharge may voluntarily repay any discharged debt, even though it can no longer be legally enforced. The federal courts' own explanation of the discharge gives a debt owed to a family member as an example. The difference is that repaying is your choice, and the person cannot force it.9 10