If you are experiencing serious issues with your finances, it’s a good idea to ask a bankruptcy lawyer before you pay back friends and family.
Say your best friend loaned you money to help you buy a car, or maybe your parents loaned you money for a down payment on a house. They are considered creditors if the agreement was that you would pay them back.
When friends, family, coworkers, neighbours, or anyone close to you lends you money, they are “insider creditors”. You have a close relationship with them, and they probably loaned you money because of that relationship.
Because of that, it’s natural to want to pay back your closest friends. It shows how much you care. But ultimately paying off friends and family could lead to a sticky situation if you need to file for bankruptcy.
Payments to Friends and Family Can be Clawed Back During Bankruptcy
There are provisions in place in the Bankruptcy Code to protect all of your creditors. When you file for bankruptcy, you must report any payments you made – including those you made to friends and family – in the previous year leading up to your bankruptcy.
When the bankruptcy process begins, a trustee is put in charge of working with your creditors to settle debts fairly and legally. The trustee could decide to claw back any payments made to your insider friends and family in order to pay off other creditors.
Despite your best efforts to pay them back for their support, this could leave your friends and family in financial hardship.
In general, payments under $600 will not be clawed back during bankruptcy proceedings. But to be sure, it’s a good idea to ask your bankruptcy lawyer.
I’m Getting A Tax Refund – Should I Pay off My Friends?
It’s almost tax season, and you may be expecting a tax return. Using that return to pay off your insider debts is a good idea, right?
Sadly, the answer to that is no. Over and above the reasons previously mentioned, there are cautions around tax refunds when you are declaring or considering declaring bankruptcy:
- If you are already in Chapter 7 bankruptcy, your tax refund will be held until you discharge your debt. That means you will not receive your tax refund until your bankruptcy is completed.
- In addition, the Michigan Department of Treasury can withhold your return to repay certain debts such as back taxes, state agency debts, garnishments, or child support.
Paying Back Friends and Family – Timing is Key
As with most issues around bankruptcy, timing is key.
- Paying back friends and family BEFORE bankruptcy – as discussed, they can be forced to pay back money you have given them. This can involve legal action which could lead to bad feelings or broken relationships, despite your good intentions.
- Paying back friends and family DURING bankruptcy – once you start bankruptcy proceedings, you will be provided with a budget for your living expenses. You are not allowed to make “insider” payments to friends and family within that budget.
- Paying back friends and family AFTER bankruptcy is the best way to ensure you can pay them back legally. Again, there are some times where this is not necessarily an option. Your bankruptcy lawyer can help you make the right legal decisions in these cases.
You are Allowed to Include Money Owed to Friends And Family in a Bankruptcy
Money you owe to insider creditors can be included in your bankruptcy. If that happens, your friends and family will be treated the same as any other person or organization you own money to. Depending on your financial situation, they may get partial repayment…or perhaps no money at all.
Looking for a Bankruptcy Lawyer You Can Trust?
If you are considering bankruptcy, contact Stephanie Krane-Boehmer for a free consultation. Stephanie takes a hands-on approach and tries to make the process of filing for bankruptcy as comfortable and understandable as possible. She takes pride in her expertise and always gives 100% to guide you through the process. Take control of your debt. Reach out to Stephanie today at 248‑293‑0048.
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