Are You Allowed to Pay Back What You Owe Loved Ones Before Filing for Bankruptcy?

What’s on your list of things to do before filing bankruptcy and should you include paying back loans from loved ones on that list?

Many people turn first to their friends and family members when faced with financial challenges. Borrowing from loved ones cuts through a lot of the red tape you’d face and allows you to turn to people who care about your well-being.

But what happens when what they offer you isn’t enough to eliminate your financial challenges? If you eventually end up filing for bankruptcy despite the financial support you receive, is paying loved ones back one of the things to do before filing for bankruptcy?

Here’s what you need to know:

Borrowing Money from a Loved One Creates a Legitimate, Legal Debt

Loans you receive from loved ones are legitimate debts. However, they don’t take priority over other debts that you have when you file for bankruptcy. If you’re considering bankruptcy, it’s a mistake to pay off these family and friend loans before you file. The court considers this prioritizing debt, which is something that’s not permitted.

It might seem like a good idea to put the people you care about ahead of impersonal creditors. Unfortunately, this plan can backfire. Allowing the court to prioritize your debt when you file for bankruptcy levels the playing field. The court requires all creditors, including friends and family, to be treated fairly.

The best chance you have of getting loved ones repaid is to allow the court to handle repayment of debts out of your bankruptcy estate. If you pay back loved ones before filing and the court disapproves, they can request payment of the money from your loved one. They the court distributes that money to your other creditors.

This is known as a clawback and you can learn more about it here.

How Does the Court Know I Repaid a Personal Debt?

Some people think they can secretly repay the money they were lent by loved ones without the court knowing. Make no mistake about it, hiding assets or payments is bankruptcy fraud. It is a federal crime that can carry fines and imprisonment. Any potential bankruptcy filer should know the bankruptcy court conducts a thorough investigation. Chances are high they’ll discover what you did.

Your financial actions just before bankruptcy are highly scrutinized. The court can claw back money repaid to loved ones for up to a year before filing.

Clawback doesn’t apply to regular payments you’re obligated to pay in the months before you file. For example, the court doesn’t have a problem with paying your car payment or mortgage during that time. However, if you paid off your vehicle loan and ignored other debts, that’s a different story.

The key to avoiding problems is to not make payments that go above and beyond the minimum due on a loan.

Is There Any Acceptable Way to Repay Your Loved Ones Before Filing for Bankruptcy?

The court handles debts to loved ones like it handles other debts. However, these debts are lower on the list of priorities. If there’s not enough money left after paying other debts to pay debts to loved ones, those debts are legally discharged. This means you’re under no legal obligation to repay your friends and family.

Of course, this doesn’t mean you can’t repay them if you choose to do so once your bankruptcy is complete. For many people, the discharge of their other debts at the end of bankruptcy frees up money to repay their loved ones. This is something you might not ever be able to afford if you don’t take advantage of the benefits of filing for bankruptcy.

An Experienced Bankruptcy Attorney Helps You Organize Things to Do Before Filing for Bankruptcy

If you’d like to know more about debt priorities or you have questions in general about bankruptcy, contact Frank LaPerch, PC of Rockland Bankruptcy at 845.875.9345.