When filing bankruptcy, it is often easy to overlook personal loans and gifts. However, this type of debt or property may have a significant impact on your bankruptcy filing. Not disclosing information regarding real estate that has been gifted to you, an outstanding loan to a family member or co-owned bank accounts can cause some unexpected problems with your bankruptcy filing.
Listing All Assets
Regardless of the size of an asset, when you file for bankruptcy it must be listed. This includes any interests in real estate that you may own with another person, a bank account which is also listed under your name, or a pending income tax refund. Failure to leave these assets off your bankruptcy filing can result in problems with your filing. If you are not controlling the asset, you must still list them and can explain why you are not the true owner of the property. Often older parents put their children on their bank account in the case of an emergency so that the daughter or son can make financial decisions for their parents. Likewise, parents are often listed on the bank account of the minor child. Even though the debtors name is on a bank account and must be listed on the bankruptcy petition, it is not the debtor’s asset a trustee or creditors could take an interest in.
Debts to Family Members
Oftentimes when we are having difficulties making ends meet, we borrow money from friends and family members. These debts must be included in a bankruptcy filing for numerous reasons. First, they are unsecured, legitimate debts. Second, you are required to list all of your debt. You cannot exclude the creditors which are more favorable to you. While it may be easy to ignore debts to friends and family members, they are unsecured creditors under the law and must be listed as creditors. Often, clients wish to repay friends and family members or a doctor they want to continue to see. You can do this after the bankruptcy is over. Even though you will not have a legal obligation and creditors can’t request money from you, you are free to repay after discharge if you choose to do so.
Repaying Loans to Family
It may be tempting to repay loans to friends and family members prior to filing bankruptcy. However, it is important to discuss this possibility with a bankruptcy attorney before you take this step. You have to list all payments within the last 12 months to insiders on your bankruptcy petition. In most cases, the trustee will ask you this question also at the 341 meeting. In some cases, this may fall under a clause in the bankruptcy code called preference. In effect, you have given preference to a debt owed to a friend or family member over your credit card payments. In these cases, the trustee of the bankruptcy may order these payments reversed and paid to all unsecured creditors equally. This can cause some problems later on when the relative or friend does not have the money anymore you paid him 6 months ago. For example if you re-pay your father in law before filing bankruptcy and it is not disclosed until the 341 meeting, the trustee will ask you father in law to repay it. You might not want to get you father in law involved in your bankruptcy proceeding. After you father in law pays back the money to the trustee, you still might feel an obligation to repay him after the bankruptcy case is over.
There are also situations in which a relative or friend might be relatively safer from request by the trustee. If the money was paid to a relative in a different state whose only income is social security and does not have the money anymore. It is unlikely that the trustee would go after that relative. Pursuing such a claim might not be successful. Even if the trustee obtains a judgment for repayment of the money to the trustee, the relative might be “judgment proof” if the only income is social security.
When you are meeting with your bankruptcy attorney it is critical that you make full disclosure of all debts that are owed including those to friends and family members. It is also important that you disclose all payments made during the prior year. Your bankruptcy lawyer can only help you if you are completely open and honest about all debts that you owe and all payments that you have made against these debts.
When you have outstanding loans to friends and family members, they may be discharged in Chapter 7 bankruptcy. However, once your bankruptcy is discharged, you have the right to repay any debts that were discharged including those to friends and family members. Failing to disclose these loans and payments can cause additional legal problems.