The Bankruptcy Code contains a number of rules regarding how you must treat debts owed to relatives. Here are some important considerations:
- You cannot omit from your bankruptcy filing debts owed to relatives. The Bankruptcy Code clearly states that a debtor must include all debts on his petition.
- You cannot pay back a relative right before you file and then try to discharge other creditors. The Bankruptcy Code contains a set of rules prohibiting preferential payments (also called “preferences”). For example Code Section 547 says that if you pay an “insider” (close relative, joint business entity) on an old debt within one year of filing, the trustee can recover that “preferential payment” from the relative you paid.
- Another issue often arises when a relative such as a parent “loans” you money to buy a house or a car, then expects to be paid back when you sell that house or a car. The question is whether that loan is a secured loan or an unsecured loan.
- If there is no paperwork setting out terms of repayment and/or if there is no security agreement executed and filed, you may have difficulty proving that your relative actually has a legally enforceable claim.
- As a general rule, it is wise to avoid engaging in any transactions with relatives prior to filing bankruptcy without first talking to a lawyer. As much as you may want to direct cash to relatives who have supported you during difficult times, making these types of payments without legal advice can backfire and put your bankruptcy relief at risk.