I Owe My Parents Money. Should I Pay Them Back Before Filing for Chapter 7 Bankruptcy?
When people fall on hard times, personally or financially, it is natural for them to turn to family members and friends for assistance. If you have borrowed money from any family members and end up filing for bankruptcy, you may be tempted to try to pay them back first. However, this might not be a wise decision.
When you file for bankruptcy, the court will gather information about everyone to whom you owe money or recently paid off debts. This includes your family or friends, if you owed them money. Under bankruptcy law, you cannot treat any of your creditors differently than the others, which means you cannot give special preference to family or friends over other creditors.
Bankruptcy law refers to these family members and close friends as “insiders,” which means you are more likely to choose to repay them first. Courts will pay special attention to any payments you made to these “insiders” before you filed. Such preference payments are illegal under federal bankruptcy law, and if you paid off any debts to friends or family within a year before filing, the court could seek to reverse the payment, taking that money back from your relatives to pay other creditors.
Preference payments are not always made to insiders — they could be made to other lenders as well, especially if they were made with the hope of being able to hold on to a particular asset. The court will be on the lookout for any unusually large payments that you didn’t have to make before filing for bankruptcy.
Protecting your family
It is understandable to be worried that your family will suffer financially because of your inability to pay back your debts. Therefore, if you wish to make sure your family will be treated as an official creditor to whom you owe money during bankruptcy, you must get an official promissory note. There must be an official document to record the amount of the loan, the parties to that loan and the terms of the repayment. Otherwise, the court will simply treat that loan as a gift.
To learn more about avoiding bankruptcy fraud when filing for Chapter 7 or Chapter 13 bankruptcy, meet with an experienced Dayton, Ohio bankruptcy lawyer at Fox & Associates Co., L.P.A.