Bankruptcy cases often create difficult and emotional situations, especially if you have borrowed money from close friends or family. People may worry whether these loans will be erased, whether their loved ones can still collect payment, or whether prioritizing repaying a friend could create legal issues. To learn more about how personal loans from friends may be treated during your case, continue reading and consult with an experienced Jefferson County, Kentucky bankruptcy lawyer today.
What is Considered a Personal Loan?
In this context, a personal loan generally refers to money borrowed from an individual rather than a bank, credit union, or commercial lender. The court does not require a formal bank-issued loan agreement for a debt to exist, so money borrowed from friends, relatives, or romantic partners may still qualify as a legitimate debt. Even informal agreements may count if there is evidence that the money was expected to be repaid.
Examples of personal loans include:
- Money borrowed for rent or mortgage payments
- Funds used for medical expenses
- Loans for car repairs or transportation
- Money advanced during financial hardship
- Personal checks, Venmo transfers, or cash loans
When determining whether a personal loan exists, the court will look at a variety of information, including written agreements or promissory notes, texts or emails discussing repayment, bank records and electronic transfers, regular repayment history, and witness testimony. If there is a lack of documentation, it can create disputes regarding whether the money was a loan or a gift.
How Are Personal Loans From Friends Treated During Bankruptcy?
Most unsecured personal loans from friends and family are generally treated similarly to credit card debt and other unsecured loans. Once bankruptcy is filed, the individual who loaned you the money officially becomes a creditor. Friends and family do not receive any special treatment or protection because of the close nature of your relationship.
In many cases, they may be dischargeable in Chapter 7 bankruptcy, meaning that you are released from the obligation to repay the debt, and the court essentially wipes it out. While this may be beneficial for you financially, it can also create tension and stress if your relative or friend is upset that they will not see their money returned.
The loan may still be paid back through Chapter 13 bankruptcy, known as reorganization bankruptcy or the wage earner’s plan. During this process, you can restructure your debts and create a manageable repayment plan that allows you to repay a portion of your debts over a three to five-year period. This may be a better option to maintain your relationship with the lender.
What if I Repay My Friend Before Filing for Bankruptcy?
Friends and relatives are often considered “insider creditors.” Payments to insider creditors near the bankruptcy filing date are heavily scrutinized. Repaying a friend or family member before filing can be considered a preferential transfer and is not allowed. The trustee may attempt to recover the money.
For more information and legal advice, contact a skilled bankruptcy attorney today.
