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Going bankrupt when you owe money to friends and family

You will always be grateful to your brother for stepping in when you started struggling financially a year ago. He loaned you $5,000 to stay afloat after you lost your job. Now, months later, you still haven’t found a position that covers more than your basic living expenses, and you’re thinking about filing Chapter 7 to eliminate those credit card bills and medical debt that you can’t afford to repay.

The only thing holding you back is that you haven’t repaid your brother yet. If you file for bankruptcy, do you have to include his loan? Maybe you should pay down that debt as much as possible before you file?

Depending on when you file, this could cause problems for you and your brother. If you pay one creditor a lot more than others, especially if that creditor is an insider, your Chapter 7 trustee could treat these payments as preferential transfers and get the money back.

What is an insider?

U.S. bankruptcy law defines insider creditors as your relatives, general partner and their relatives, partnerships in which you are a general partner, and any corporation in which you hold a position of control, such as a director or officer.

Under ordinary circumstances, the bankruptcy court will examine your transactions within the 90 days before your filing to see if you tried to pay off debts owed to preferred creditors. If you have insider creditors, that look-back is extended to one year.

In other words, if you repay some or all of your brother’s loan within one year prior to filing for Chapter 7, your trustee can void the payments and seize the money so that it can be fairly distributed among your other creditors. If your brother refuses to relinquish the funds voluntarily, the courts can get involved, which is an unpleasant process you want to avoid.

What can you do when you owe money to friends and family?

If you didn’t sign a promissory note, the court might treat your brother’s loan as a gift, and you can choose to repay him after your discharge. If you did sign a note, he probably wouldn’t receive much (if anything) through the bankruptcy process if you have no high-value assets that aren’t covered by an exemption. Although your legal obligation to repay the debt will be discharged at the end, you can always choose to pay your brother the full amount afterward.

If you have questions about insider payments and how they could affect your Chapter 7 filing, talk to your New York bankruptcy attorney. They will explain how the law applies to all transactions made within 90 days to a year before you file and help you address any mistakes you may have unintentionally made.

If you are considering filing for bankruptcy, then contact Jayson Lutzky, P.C. We are a law firm handling personal bankruptcy cases. Mr. Lutzky offers free in-office initial consultations. Call 718-329-9500 to set up an appointment or visit www.MyNewYorkCityLawyer.com/Bankruptcy to learn more.

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