Should You Pay Back What You Owe Loved Ones Before You File for Bankruptcy?

Florida Bankruptcy Laws

It’s common for people who are struggling financially to turn to their friends and family for help. In many cases, people who know you want you to succeed and overcome the challenges in your life. Many are willing to offer financial support when it’s needed. But what do Florida bankruptcy laws say about the repayment of money lent to you by loved ones?

In general, personal loans are legitimate debts, but they don’t take priority over other debts that you have when you file for bankruptcy.

If you are considering bankruptcy or you’ve begun the process, should you start by paying back money lent to you by friends and family?

The simplest answer to this question is “no.”

The key to a successful bankruptcy is not prioritizing one debt over another. Although it might seem as if leaving your loved ones unpaid, it actually levels the playing field. Florida bankruptcy laws require that all creditors, including friends and family, be treated fairly.

Will the Court Know I Repaid a Personal Debt?

When you file, you must list all of your debts, including those you owe to people you know. The court then treats these people just as it treats all other creditors, as long as something official documents the loan. If a loved one lent you money without proof of doing so, the court tends to view the loan as a gift. Make sure you create a paper trail that lets the court know the exchange is a loan if you borrow money from a loved one.

If you think you can take care of a debt to a family member or friend before filing and that it will go unnoticed, think again. The court views creditors to which you have a personal connection as insiders. They know you are likely to prioritize them over others. The money you give to loved ones in the weeks and months leading up to your bankruptcy will be scrutinized and in some cases, that person will need to turn over to the trustee what you gave to them.

Florida Bankruptcy Laws Allow the Court to “Claw Back” Payments

The bankruptcy court has the power to reverse any payments you made within the last year. The money you used can be “clawed back” from loved ones. This goes for all debts you’ve prioritized over others, whether you have a personal relationship with them or not. The difference is with non-insider payments, the court only goes back 90 days instead of a year of payment history.

Claw-back doesn’t apply to regular payments you manage to fulfill in the months before you file. For example, if you pay your car payment or mortgage during that time, the court won’t have a problem with it. However, if you pay off your vehicle loan and ignore all of your other debts, that’s a different story. The court looks for payments made that go above and beyond the minimum due on a loan.

To learn more about the claw-back process, check out this article from Investopedia.

Is There a Legal Way to Make Sure Your Loved Ones are Paid?

If you’ve documented money lent to you by friends or family, the court will include that debt in your bankruptcy. Depending on which chapter bankruptcy you use, the debt will be discharged or paid off in part or in full. It all depends on how the court prioritizes the debt in comparison to your other debts.

The good news is that even if the bankruptcy court discharges a debt and doesn’t legally require you to repay it, you’re free to do whatever you want with it once your bankruptcy case is complete. If the discharge of your other debts through bankruptcy frees up money to repay your loved ones, you have the right to do so. Many people opt for this option because of the importance of fulfilling their debt obligations to people in their lives.

If you’d like to know more about Florida bankruptcy laws, debt priorities, or you have questions in general about bankruptcy, contact the Law Office of Robert M. Geller at 813-254-5696 to schedule a free consultation.