Image courtesy of EivArch (Flickr).
There is no secret that if you are meeting with me, you are experiencing some level of financial hardship.
Most people view bankruptcy as a last resort. I wish this wasn’t the case as years of suffering and monies lost to excessive interest could easily be avoided if we switch our perspective.
Overcoming the irrational and false stigma surrounding bankruptcy is often difficult and courageous.
When going through a troubling time, most people will reach out to family and friends for support and guidance.
Friends and/or family are usually more than willing to lend money in an attempt to help a struggling loved one.
Unfortunately, family and friends can only do so much and typically it’s not enough to resolve long term financial hardship. It’s a band-aid that must be ripped off and bankruptcy becomes the necessary course of action despite best efforts.
In bankruptcy, monies borrowed from and/or paid back to family and friends could bring to the surface certain issues that need to be addressed.
Money Borrowed Before Filing Bankruptcy
When you file bankruptcy, you are required to list all of your creditors. The disclosure requirements in the bankruptcy law are serious and strict. Failure to disclose information in your bankruptcy petition could result in denial of discharge or worse.
Aunt Jean and Uncle Chuck are no different than One Main Financial or Wells Fargo. If owe them money than they are a creditor and must be listed on your bankruptcy petition as such.
I am often asked if it is possible to leave out a family member or friend from the creditor list and simply “not mention it.”
You sign your bankruptcy petition under penalty of perjury. Violating the bankruptcy law is quite a serious matter so my answer is always “no.”
I follow that up with a “don’t worry.” You can choose to voluntarily pay back any creditor you like post bankruptcy discharge. You do not have to “stiff” Aunt Jean or Uncle Chuck or Wells Fargo for that matter. .
Money Paid Back Before Filing Bankruptcy
Debts paid back to family members or friends (or other “insiders”) within one year of filing bankruptcy are classified as a specific type of preference. Essentially, you showed preferential treatment to certain creditors (because of your relationship to them) to the detriment of the others.
The bankruptcy law makes these types of preferences “avoidable.” This means that the Bankruptcy Trustee can “claw back” that money from the family member, put it into a pot to distribute evenly to all of your creditors.
Most people considering bankruptcy are facing repossession, creditor harassment, bank account levies and/or wage garnishments. There is usually not enough time to wait for that one year statutory period to expire.
If you have paid back a family member or friend within the one year period, you can still file but should be prepared to pay that amount to the trustee to avoid the claw back.
The best way to avoid this situation and other pre-filing issues is to consult with an experienced bankruptcy lawyer as soon as you start to run into financial problems.
Do not listen to so called “financial experts” and “do gooders” who have financial advice for you.
Bankruptcy should not be considered a “last resort,” but rather a first line of defense against financial ruin.