In difficult economic times, I regularly hear from small business owners who have been forced to shut down because of low sales. I recently heard from a blog reader named Evan who writes as follows:
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Should you pay back your parents, siblings, friends or other relatives before filing bankruptcy? I get this question frequently as many of the potential clients I see have borrowed money from private sources in an effort to avoid bankruptcy.
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Back in April, I wrote a post about the issue of balance transfers and Chapter 7 bankruptcy. In this post I note that balance transfers were dangerous because from the perspective of the new credit card issuer, the transfer was new debt. In other words, if you have been carrying a $10,000 balance on your Discover account, for 5 years, and two weeks ago you transferred this balance to a new Citibank account to get a better interest rate, that $10,000 debt is new debt as far as Citibank is concerned.
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I loan a family member a large sum of money a year ago. Now this family member is filing for bankruptcy and has ask for my name and address and the amount borrowed from me. According to the family member the courts can list this as a debt owed and I would be included in this repayment plan. Is this true? I did not think personal debt owed to family and friends could be file under bankruptcy.
– Alice
Jonathan Ginsberg responds: Alice, when someone files bankruptcy, he must list and include all debts, including debts owed to family members. There is no exception for family members.
In fact, if your relative had paid you back within a year of filing, there is a good chance that the bankruptcy trustee would demand that you return the money as a "preference."
If your relative is filing a "repayment plan," it means that he is in a Chapter 13 bankruptcy. Assuming that the loan you made was a "handshake" loan, then your claim would be unsecured. In Chapter 13 case, unsecured debts are paid after priority (taxes, child support) debts and after secured (cars, houses, furniture) debts. You may not get a check from the Chapter 13 trustee for two or three years. You also may not get paid at 100% as many Chapter 13 cases call for less than 100% payouts to unsecured creditors.
When you get the bankruptcy notice, you will see a Proof of Claim form included in the letter. If you want to get paid something, even if you won’t see any money for a few years, you need to fill out this proof of claim and send it to the Clerk of Bankruptcy Court.
Finally, be aware that the automatic stay of bankruptcy prohibits you from trying to collect your money outside the bankruptcy process. You do not, however, have to send this relative Christmas cards or invite him over for dinner!
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My colleague attorney Scott Riddle recently posted on his Georgia Bankruptcy Blog an important reminder to both debtors and their counsel about the importance of full and complete disclosure of assets and debts in bankruptcy petitions.
I see a possible trap for the unwary in one of the October 17, 2005 changes to the Bankruptcy Code. I do not have a firm answer to this and I welcome any suggestions or thoughts.
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