Loans Owed to Family Members in Bankruptcy

Quite often when people begin experiencing financial problems, they turn to family for personal loans to pay debts or meet basic living expenses. More often than not, loans from family are unsecured meaning that, unlike a home mortgage or car loan, no collateral is involved in the loan. When filing bankruptcy, loans from family members should be included in the debts on the debtor’s bankruptcy schedules. Personal debts owed to family members are not entitled to special priority or preferential treatment over debts owed to other creditors.

Many people are inclined to repay loans owed to family members before they file bankruptcy. However, if you file Chapter 7 bankruptcy and repay a loan to an “insider” (a family member or business partner) within one year of filing your bankruptcy petition, the payment may be considered a preferential transfer. In such case, the bankruptcy trustee may try to recover the payment so that it may be distributed among your other creditors. The bankruptcy trustee will also look at payments you made to “non-insider” creditors within 90 days of filing the bankruptcy petition to see if any other creditors may have been given preferential treatment.

It is important to note that you can always repay a family member (or anyone, for that matter) after the bankruptcy proceeding is concluded.

Since each individual’s financial situation is unique, you will benefit from a consultation with an experienced and competent bankruptcy attorney who can advise you of your rights, and the options that are available to best meet your goals. If you are a resident of western North Carolina and are considering filing for bankruptcy, please call our office at 828-258-3368 and schedule an appointment for a free consultation with our board certified bankruptcy attorney, David R. Hillier.

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