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Don't Do This Before Filing for Bankruptcy

Feb. 26, 2021

Did You Borrow Money from Relatives or Friends?

If you have borrowed money from friends or family members before you file for bankruptcy, here is one thing you definitely should not do. There are a number of technical rules that control this situation, and I will make this as simple as I can for you.

It's certainly not unusual for a person to borrow money from friends and relatives when you're in trouble. Now let's assume you borrowed $5000 just 6 months ago from your parents. You are thinking of filing for bankruptcy because you just have so many debts and you have heard that a successful bankruptcy can wipe out all you debts in about 4 months, and you can have a fresh financial start. You still have $3000 left from the money your parents loaned you, and you'd like to pay that back to them before you file your bankruptcy case, so you give them the money, and then you go see a bankruptcy attorney. Let's also assume that you did not tell your attorney that you recently paid back $3000 to your parents.

But when you have your meeting with the trustee, and he asks you if you have paid back any friends or relatives any money within the last year, you are surely not going to lie under oath, so you tell the trustee about the $3000 you paid back to your parents.

Let's make a somewhat complicated rule simple: I you pay back a relative less than a year before you file for bankruptcy, the trustee could force that relative to give him that money. By keeping it simple, I am not going to go into the reasons for this rule. If you really want to know the reasons you can contact me. The one year rule is a little different if you paid someone other than a relative. If you are paying back a non relative, the trustee might only ask if you paid back non relatives within a period of 90 days before you filed your case.

.There is a lot more to this rule, so please make sure you make full disclosure to your attorney when he asks you if you have paid back certain debts to friends or family members before filing you case, and you should be able to avoid a lot of potential headaches for yourself, your friends, and your relatives.

And please also keep this in mind. Let's go back to the example. You owe $3000 to your parents, and you are ready to file bankruptcy. You feel guilty and you want to pay them back, and your attorney tells you - don't do it now. The reality is that after your bankruptcy is over, you can pay back anybody you want to. The debts are wiped out, but you have the right to pay anyone that you owed money to before the bankruptcy. So, hopefully your parents, other family members, or friends won't mind if you ask them to wait a little while before you pay them back (if that's what you intend to do). It's definitely a lot better than paying them back shortly before you file your bankruptcy and causing lots of problems for everyone.

I realize that many of you might think of this as an unusual rule, and I'd be happy to answer any questions you might have about it. Feel free to call me any time. Thank you.