How The Bankruptcy Court Handles Debt To Family And Friends

Posted on

When your debts spiral out of control, it's normal to turn to friends and family for help getting back on track. It's also natural to want to repay the money loaned to you as soon as possible. However, it's important to talk to a bankruptcy attorney before doing so, because you can create even bigger problems for yourself and your loved ones if you do it the wrong way. Here's what you need to know about using bankruptcy to repay debt to friends and family members.

All Debts Must Be Documented

Debts to friends and family can be included in your bankruptcy petition. Those debts will be wiped out in a chapter 7, while a portion of the money owed will be repaid in a chapter 13. However, the court won't do anything with the debts if they are not officially documented. This means there must be a contract or promissory note of some kind detailing the specifics of the loan; otherwise, the court will consider the money a gift.

Although it may feel odd to ask, especially if the money was loaned to you a long time ago, draw up a contract with person you've borrowed money from and submit the signed documents to your trustee. This ensures the debt will be recognized by the court and paid or discharged properly.

The Amount Paid Corresponds to the Debt's Size

Chapter 13 lets you repay your creditors, which can help your credit in the long run. However, the amount of money a creditor receives every month depends on how big the debt is compared to the total amount you owe.

For instance, if the $5,000 you borrowed from your sister accounts for 10 percent of your total debt profile, your sister would only receive 10% of the payment you make to bankruptcy court every month. Additionally, she would only be paid as much as she would've received if you had filed chapter 7 bankruptcy. So, if she only would have gotten $2,000 in a chapter 7, that's how much she'll be paid in the chapter 13.

With few exceptions, any balance remaining on debts will be discharged at the end of your chapter 13 bankruptcy. Thus, you won't have to pay the debt in full if you didn't want and the creditor wouldn't be able to sue you for the balance. If you want to stay on good terms with your friend or family, you can use your newfound financial freedom to pay the rest that's owed.

There are other issues that affect how loans from friends and family are handled in bankruptcy court. Contact a firm, like Haven Law Group, P.C. ,for advice and assistance.


Share