What happens to personal loans and gifts in bankruptcy?

Like many people in the Denver metropolitan area, if you are drowning in debt, you may turn to friends and family for help. Loans and financial gifts are not so easy to obtain from banks and other financial institutions. You may have good intentions to repay them. However, hardships and other circumstances could cause you to fall further into debt and have you wondering if bankruptcy is the next step.

Before you file for bankruptcy, you should learn what happens to personal loans and how you can avoid issues that cause delays or adverse decisions in your case.

Full financial disclosure

You must provide a full accounting of your financial profile, including your loans and debts. If you have borrowed money from a friend or relative, you need to include the amount owed, along with a copy of the promissory note. The document must detail repayment terms and penalties for nonpayment as well as identify you and the lender. Without a promissory note, the court does not have any legal proof but hearsay that the transaction took place. You must still list all sources of money, including gifts (loans without promissory notes).

The necessary documentation

The court classifies personal loans that do not have proper documentation as gifts. Gifts are not subject to repayment in bankruptcy. You should still make every effort to repay what you owe your friends and family. Keep in mind that once you complete Chapter 7 or Chapter 13 bankruptcy, certain unsecured debts are no more. Your loved ones might not be as understanding or accepting of the outcome, especially if the bankruptcy court classifies what you owe them as a gift.

It is important to keep a record of all financial transactions, especially loans that come from close friends and relatives. Failure to provide all pertinent and requested information to the courts is a crime and could affect the outcome of your case, relationships and life. Also, you should research your bankruptcy options to avoid mistakes and fraudulent transfers. When done right, bankruptcy can give you a fresh start.