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Family Loans in Bankruptcy

When you take a loan from a family member, it may mean you're struggling to pay your bills. This could be the first step in realizing that bankruptcy might be an option for you. A loan from a family member may put you in better financial circumstances, but many people quickly find themselves falling into old habits and getting further into debt. So what happens to family loans in the bankruptcy court?

Include this Loan in Your Filing

Loans from family members can play a critical role in your bankruptcy filing. While many bankruptcy filings include debts related to credit cards or medical bills, it's essential that you include this loan in your bankruptcy petition. First of all, the Bankruptcy Code requires that all debts are listed. Secondly, the goal of filing bankruptcy is to eliminate debt all eligible debts.

This does not prohibit you from paying back your family member after your case is over. The act of including this loan only serves to protect you in case you are unable to repay this debt.

Family Members as "Insiders"

According to the Bankruptcy Code, family members can be considered "insiders". Therefore, if you have made any payments totaling more than $600.00 on a loan from anyone that's defined as an insider within the last year, this information must be disclosed. It is possible that the trustee of your bankruptcy case might require your relative to return the money you've paid on this loan. The trustee may decide it's best to distribute these funds to other unsecured creditors. In this scenario, your relative will temporarily lose the money you've already paid.

While this can create an awkward situation, you are allowed to repay your relative any money owed after this procedure takes place. Furthermore, there are no guarantees the trustee will even ask for your relative to give back any funds you've paid him or her.

Disclose all Family Loans

Despite the obvious conflicts and stresses that revealing this family loan can cause in the bankruptcy process, it is important to disclose everything. By hiding any facts related to your bankruptcy case, you could risk having it dismissed or being charged with bankruptcy fraud.

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