Family Loans in Bankruptcy
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Family Loans in Bankruptcy

Anyone considering personal bankruptcy is wise to learn as much as possible about how the bankruptcy court is likely to handle various debts. One common concern among potential bankruptcy filers is about family loans in bankruptcy.

Loans from family members or friends can be discharged or repaid through bankruptcy. In fact, these loans must be included in a bankruptcy filing.

Family Loans & Bankruptcy Fraud

One important thing to note about family loans is that they are treated like any other loan or debt in bankruptcy court, which means:

  • Prepayments are prohibited. Some people may want to repay a family member who loaned them money before filing for bankruptcy, but that action could jeopardize a bankruptcy discharge.
  • Filers should avoid bankruptcy fraud. In fact, prepaying a family member before filing a bankruptcy case could be considered an instance of bankruptcy fraud. Bankruptcy fraud comes with stiff penalties, including the potential dismissal of a bankruptcy case, fines up to $500,000 and the potential for jail time.

Because this might cause tension among family members, filers who owe their families money may want to consider speaking with family lenders before filing and perhaps working out a reaffirmation agreement.

Family Loans in Chapter 13 & Chapter 7

The way a family loan is handled in bankruptcy court depends largely on what type of bankruptcy the filer chooses. Here's a look at the potential differences between the two most common types of personal bankruptcy.

  • Chapter 13 bankruptcy: In this type of bankruptcy, the family loan would likely become part of the filer’s three- to five-year repayment plan, meaning that the family member could expect at repayment over a period of time. However, if the family loan was unsecured, it may be repaid only in part or not at all, based on the amount of secured debts and disposable income.
  • Chapter 7 bankruptcy: In this chapter, the family loan (if unsecured) could be discharged entirely, meaning that the family member would receive little or nothing. While there's a chance that money raised by the sale of the filer's non-exempt assets might repay the family member in part, chances of full repayment are usually slim.

Of course, each case is difference. If you would like to speak with an attorney specifically about your financial situation, please fill out this form for a free legal consultation.

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