Chapter 13 bankruptcy is commonly used by people to reorganize debts. It addresses all debts -- including those owed to family members. People filing for Chapter 13 are forced by federal law to include debts owed to relatives. Chapter 13 and other types of bankruptcy requires a listing of all debts.
Considerations
A Chapter 13 bankruptcy requires a commitment of three to five years because of its required payment plan. Loans from family members are included in the payment plan, but there is no guarantee they will receive money. Participants in bankruptcy follow a strict budget closely monitored by the bankruptcy court. The court establishes reasonable limits on living expenses, with remaining money used for the payment plan. Some people in Chapter 13 do not have money left over after living expenses; and in those situations, no money goes to unsecured creditors such as family members. That means family members, at a minimum, could wait three or five years for full repayment -- or receive nothing at all. The bankruptcy court dismisses all debt remaining in the payment plan after three to five years.
Guilt
Some people in Chapter 13 feel bad about listing debts to family members. Many wish they could keep the debts separate from the bankruptcy and find a faster way to repay their family members. However, failing to disclose all debts could lead to a dismissal of the bankruptcy. The bankruptcy courts take the application process very seriously, with Chapter 13 participants forced to testify under oath that their applications are correct and list all assets and debts.
Mistakes
It is possible to forget about an insignificant debt owed to a family member, and the court makes allowances for that. If you file for Chapter 13 and forget to disclose a $50 loan from an aunt, you can tell the bankruptcy trustee about the oversight. There are provisions for correcting honest mistakes without dismissing the entire bankruptcy. Forgetting a large loan from a family member, though -- say, for more than $10,000 -- is likely to receive significant scrutiny from the judge as she decides how to handle the omission.
Advice
A reputable bankruptcy attorney can offer sound advice on addressing debt to family members before filing for bankruptcy. For example, the attorney can discuss the timing of the bankruptcy, with the possibility of paying all or some of the debt to family members before filing the application. Or the attorney can discuss avenues for treating money from a family member as a gift -- with the cooperation of the family member.
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